WHAT IS THE EUROSYSTEM DOING AND WHY? HOW FAR IS THE EUROSYSTEM READY TO GO? ULDIS RUTKASTE HEAD OF MONETARY POLICY DEPARTMENT
WHAT IS THE EUROSYSTEM DOING AND WHY? HOW FAR IS THE EUROSYSTEM READY TO GO?
ULDIS RUTKASTE
HEAD OF MONETARY POLICY DEPARTMENT
2
45
47
49
51
53
55
57
59
III 2
01
3
V
VII
IX
XI
I 20
14
III V
VII
IX
XI
I 20
15
III V
VII
IX
XI
I 20
16
III
Developed Markets Emerging Markets
Euro area World
The global outlook remains weak, leading indicators show only subdued growth
Composite PMIs, s.a., diffusion index
Source: Markit, IMF
0
1
2
3
4
5
6
7
8
9
10
-6
-4
-2
0
2
4
6
8
10
Developed markets Emerging and developing economies
Global GDP growth, %
3
Real GDP in euro area (growth rate, %, s.a.)
Source: Eurostat, ECB
-1.5%
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
I II III IV I II III IV I II III IV I II III IV I
2012 2013 2014 2015
yearly change
quaterly change
ECB has lowered the EA growth forecasts to 1.4% in 2016 and to 1.7% in 2017
1.4% 1.7% 1.8%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
2016 2017 2018
March-2015 June-2015 Sept-2015
Dec-2016 March-2016
ECB real EA GDP projections
4
Euro area inflation (% p.a.)
Source: Eurostat, ECB
Euro area inflation remains low, ECB keeps lowering the projections
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
2012 2013 2014 2015 2016
Realized yoy HICP
ECB's target
ECB inflation projections (% p.a.)
0.1%
1.3% 1.6%
0.0%
0.5%
1.0%
1.5%
2.0%
2016 2017 2018
March-2015 June-2015 Sept-2015 Dec-2016 March-2016
5
Inflation swap implied 5y5y forward rate (%)
Source: Bloomberg
Market implied long term inflation expectations show deterioration
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
2010 2011 2012 2013 2014 2015 2016
Euro area
US
ECB's target
6
Source: ECB
Eurosystem is responding to weak inflation outlook
Sep -2014 Jun - 2014
Jan-2015 Dec-2015 Mar-2016
0.15% 0.05% 0.05% 0.05% 0.00%
-0.1% -0.2% -0.2% -0.3% -0.4%
targeted long term refinancing operations (TLTRO) introduced with a maturity of up to 4 years
EA central banks start purchasing private sector assets (ABS, CBPP3)
EA central banks start purchasing public sector bonds, until September 2016
purchasing of government bonds extended until March 2017
private sector bond purchase program (CSPP) announced
government bond purchase program volumes raised from 60 bn to 80 bn per month
new long-term refinancing program announced (TLTRO II), central banks ready to pay money to commercial banks if they extend credit to the real economy
MRO
Depo
Un
con
ven
tio
nal
m
easu
res
7
Eurosystem provides plenty of liquidity for the banking system
Standard
instruments
(MRO, ELA)
Bank liquidity
TLTRO ABSPP CBPP3 PSPP CSPP
8
Excess liquidity in the Eurosystem (€ bn) and important ECB announcement dates
Source: ECB, Bloomberg
Since the beginning of 2014, the excess liquidity in Eurosystem has risen significantly
0 bn
100 bn
200 bn
300 bn
400 bn
500 bn
600 bn
700 bn
800 bn
900 bn
0 bn
100 bn
200 bn
300 bn
400 bn
500 bn
600 bn
700 bn
800 bn
900 bn Excess liquidity in Eurosystem
Announce negative rates and TLTRO
Lower rates further
Announce EAPP
Announce CSPP and lower rates further
9
APP and its programs (EUR, bn)
0
500
1,000
1,500
2,000
09-2014 12-2014 03-2015 06-2015 09-2015 12-2015 03-2016 06-2016 09-2016 12-2016 03-2017
PSPP
ABSPP
CBPP3
Forecast period
APP
So far APP has been implemented smoothly, more boost to liquidity still to come
Souce: Bloomberg
APP TO
DATE
€918 bn
10
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Forecast period
Total assets
Expected total assets
Eurosystem's balance sheet and expected developments (EUR, bn)
The APP was initially calibrated to help reaching Eurosystem’s total assets at ~ 3tn EUR by the end of the program. After March extension, this level will be exceeded by a significant margin
Souce: ECB
Eurosystem's TOTAL ASSETS TO DATE
€3.0 tn
11
G4 central bank balance sheets – percent of GDP*
For BoE – last reported BS values at February 2015, since then BS value assumed to be constant
Source: Reuters, Fathom Consulting, BoL calculations
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
US
UK
EA
Japan
Eurosystem has caught up with Fed balance sheet in relative terms
12
Main money market rates in euro area ( % p.a.)
Source: Bloomberg, ECB
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2012 2013 2014 2015 2016
EONIA Euribor 3M ECB deposit facility rate ECB marginal lending facility rate ECB refinancing rate
Expansionary monetary policy has contributed to a significant fall in interest rates
13
Eonia forward curves derived from EUR OIS (%)
-0.50%
-0.25%
0.00%
0.25%
0.50%
0.75%
ECB GovC decision on APP (Jan.2015) ECB GovC decision on APP extention to March 2017 (Dec.2015) Last day (May 6, 2016)
Source: Bloomberg and Bank of Lativa calculations
Eonia futures have declined significantly
14
German and US sovereign yield curves (% p.a.)
Source: Bloomberg
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3M 6M 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y
Germany (last) Germany (May'14) US (last) US (May'14)
The sovereign bond yields have decreased across the curve since the mid-2014
15
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
2012 2013 2014 2015 2016
Portugal
Italy
Spain
Slovenia
Ireland
France
Austria
Germany
10Y sovereign yields in EA (%)
-213
-183
-169
-168
-162
-153
-148
-140
-136
-136
-119
-98
-95
-250 -200 -150 -100 -50 0
IE
IT
SK
ES
BE
FR
NL
AT
FI
DE
UK
PT
USA
Yield change since June-2014 (bps)
Source: Bloomberg
Government borrowing has became cheaper especially in the peripheral countries
16
Bank lending rates to NFCs (new business, % p.a.)
Source: ECB MIR, BoL calculations.
The sample of vulnerable countries includes CY, ES, GR, IE, IT, PT, SI
The decline in rates has been transmitted also to the retail borrowers
0.0%
1.0%
2.0%
3.0%
4.0%
2012 2013 2014 2015 2016
EA average Vulnerable EA countries* Other EA countries
2.6%
3.7%
2.1%
1.7% 2.0%
1.6%
0.0%
1.0%
2.0%
3.0%
4.0%
NFCs (EA) NFCs (Vulnerable
EA)
NFCs (other EA)
May-2014 March-2016
-1.7 -0.5 -0.9
17
MFI lending to domestic households and non-financial corporations (annual growth rate, %, s.a., adjusted for sales and securitization)
Source: ECB
-4.0%
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
2012 2013 2014 2015 2016
HHs
NFCs
However, despite the extremely favorable financial conditions, rebound in lending is relatively slow
18
MFI lending to domestic households and non-financial corporations (annual growth, %)
Source: ECB The sample of vulnerable countries includes CY, ES, GR, IE, IT, PT, SI
…and uneven across the EA
-10
-8
-6
-4
-2
0
2
4
2012 2013 2014 2015 2016
Yoy growth in the euro area vulnerable countries*
Yoy growth in the euro area countries with macro-financial stability
Yoy growth in the euro area
19
Exchange rate of the euro against the US dollar (rhs) and interest rate differentials in % (lhs)
Source: Bloomberg and BoL calculations
EUR/USD is reflecting the monetary policy divergence between ECB and Fed
1.00
1.05
1.10
1.15
1.20
1.25
1.30
1.35
1.40
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
2012 2013 2014 2015 2016
EUR/USD
USD 1Y1Y
EUR 1Y1Y
20
Both stability and growth need 3 legs to stand on
20
21
General Government debt (% of GDP)
Source: Eurostat
177
133 129
109 106 99 96 94
86 83 71
65 64 63 53
43 36
21 10
65
91
0
20
40
60
80
100
120
140
160
180
200 2007
2014
2015
EA '07
EA '15
The rapid increase in sovereign debt level raises serious concerns about its sustainability and future economic growth
22
General Government budget balance (% of GDP)
Source: Eurostat, EC
-15.2 -13.9
-11.0 -9.8 -9.3 -8.9
-7.9 -7.2
-6.1 -5.6 -5.5 -5.5 -5.3 -5.3
-3.3 -3.0 -2.5
-0.5
0
-6.5
-1.6
-4.7 -4.4
-1.1 -1.6 -2.7
-3.8 -2.9
-0.7
-2.9 -1.8
-2.7 -1.4 -1.5
0.6
-3.1
0.6 0.4
-16.0
-14.0
-12.0
-10.0
-8.0
-6.0
-4.0
-2.0
0.0
2.0 2009
2015
Budget deficit is still close or above the 3% threshold in several euro area countries
23
Ease of doing business in 2015 (overall rank)
Increase in TFP achievable by moving the structural and institutional indicators towards best performers
Source: World bank, Doing Business, 2016. Top-3 in overall doing business are: Denmark, Singapore, New Zealand
Best performers in euro area on specific issues are: Ireland on doing business, Finland on governance, Estonia on employment protection.
Euro area economies would benefit substantially from addressing current structural weaknesses
24
Euro area HICP and swap-implied inflation path (% p.a.)
Source: Bloomberg, Bank of Latvia calculations
Eurosystem will reach its inflation target eventually, but it would be faster if supported by structural reforms
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
20
19
20
20
20
21
20
22
20
23
20
24
20
25
20
26
Realized yoy HICP
Swap-implied expected HICP path (last)
Potential HICP path with strong commitment to structural reforms
ECB's target