Monetary policy implementation in times of crisis
The global financial crisis, which began in August 2007, necessitated far-reaching policy responses, including monetary policy action. The Eurosystem launched a range of extraordinary monetary policy measures to support the effective transmission of monetary policy decisions to the financial system, the real economy and inflation.
These measures are referred to as nonstandard (or unconventional) as they are temporary in nature and deviate from the way monetary policy was conducted up to 2007. The need for taking these measures arose as the interest rate decisions of the Governing Council of the ECB failed to be effectively transmitted to the economy as a whole. All the nonstandard measures taken since 2007 are in line with the statutory operational monetary policy framework that has been in place since before the crisis.
Nonstandard policy measures aside, the Eurosystem's monetary policy framework generally provides for a number of mechanisms counterbalancing potential stress in the financial sector. To give a few examples:
- The broad definition of eligible assets helps banks to refinance themselves with the Eurosystem.
- The wide range of eligible counterparties allows many banks to directly access the central bank in case of a dysfunctional interbank market.
- The marginal lending facility provides banks overnight access – against eligible assets – to central bank liquidity outside the interbank market.
Nonstandard monetary policy measures since 2007
The monetary policy measures taken since 2007 have amplified the stabilizing effect of the pre-crisis monetary policy instruments and have extended their effect to include financial markets other than the money market. The main measures are as follows:
- Extension of the maturity of liquidity-providing operations:
Maturities of up to four years facilitate bank refinancing and support longer-term planning and lending.
- Changes in the allotment of liquidity:
Since October 2008, all refinancing operations have been conducted as fixed rate tenders with full allotment. This ensures that, subject to adequate collateral, counterparties have unlimited access to central bank liquidity. This tender procedure is expected to remain in place until the end of the last reserve maintenance period of 2017.
- Collateral requirements:
The list of eligible collateral accepted in Eurosystem refinancing operations was extended during the financial crisis. This allows banks to use a wider range and higher proportion of their assets to obtain central bank liquidity.
- Currency swap agreements:
In cooperation with the U.S. and Swiss central banks, the Eurosystem provided U.S. dollar and Swiss franc liquidity to the euro area banking system. This measure supported banks that otherwise would have faced a substantial shortfall in foreign currency funding during the financial crisis. Meanwhile, only the U.S. dollar liquidity swap arrangement is still in place.
- Sovereign bond purchases to reduce risk premiums:
The Securities Markets Programme (SMP) was introduced in May 2010 in response to tensions in some segments of the financial market, in particular in the euro area sovereign bond markets. In fall 2012, the SMP was replaced by Outright Monetary Transactions (OMTs) to specifically support the sovereign bond markets of euro area countries subject to certain European Stability Mechanism (ESM) programs.
- Securities purchase programs:
Three covered bond purchase programmes (CBPP1-3) and the asset-backed securities purchase programme (ABSPP) have been launched to revive and support the respective refinancing markets, which are of great importance to European banks. Under the ABSPP, the Eurosystem purchases a broad portfolio of simple and transparent asset-backed securities with underlying assets consisting of credit claims against the euro area nonfinancial private sector. Under the CBPP3, the Eurosystem purchases a broad portfolio of euro-denominated covered bonds issued by banks domiciled in the euro area. Both programs aim at stimulating bank lending to the private sector in the euro area.
In early 2015, the Eurosystem expanded its asset purchase programmes by introducing the public sector purchase programme (PSPP) to counter the downward drift in inflation expectations. From March 2015 to March 2016, the combined monthly asset purchases under the CBPP3, the ABSPP and the PSPP amounted to EUR 60 billion. From April 2016, monthly purchases in public and private sector securities will amount to EUR 80 billion. The purchases, called Quantitative Easing (QE), are intended to be carried out at least until March 2017 and in any case until the Governing Council sees a sustained adjustment in the path of inflation that is consistent with its aim of achieving inflation rates below, but close to, 2% over the medium term.
In June 2016, the Eurosystem added a corporate sector purchase programme (CSPP). The CSPP comprises of purchases of bonds issued by nonbank corporations established in the euro area. It aims at further strengthening the pass-through of the Eurosystem’s asset purchases to the financing conditions in the real economy.
- Forward guidance:
The ECB started to provide guidance on the future path of its monetary policy stance at its press conference in July 2013. At present, the Governing Council of the ECB expects the key ECB interest rates to remain at present or lower levels for an extended period of time, and well past the horizon of the Eurosystem’s net asset purchases (March 2017).