Member of the Excutive Board of the ECB, Benoît Cœuré's presentation at Barclays' European Conference. The following are selected passages and graphs from the presentation, The Monetary Policy of the European Central Bank:
The overachring principles guiding monetary policy:
...Knowing that monetary policy does not cure structural economic malaise is one of the overarching principles guiding central banks. Equally important are price stability – as a clear overriding objective – as well as central bank independence and credibility. Let me elaborate on these principles and on how they have supported the ECB’s monetary policy in recent times.
Independence is essential for central banks, particularly in periods of sovereign funding stress. Whenever state finances are unsustainable, the likelihood of governments exerting pressure on central banks to monetise their debts increases. In a monetary union founded on monetary independence and a clear mandate for the central bank, this temptation is ruled out. In such a union, shocks to the "d" factor can even have desirable collateral effects. They can provide incentives to sovereigns to pursue sustainable state finances and to undertake the necessary structural reforms. Switching this mechanism off would weaken incentives to conduct the right economic policies.
Monetary policy committed to price stability and conducted independently and credibly will not only deliver low inflation rates but also contribute to financial stability. I deliberately use the word “contribute” as price stability is a necessary but insufficient condition for financial stability. Financial stability is the joint outcome of:
sound prudential regulation, supervision and oversight of financial intermediaries, financial markets and financial market infrastructures, and of
sound macroeconomic policies – comprising monetary policy and fiscal policy.
Nevertheless, its contribution to financial stability can be significant. In particular, a timely exit from non-standard measures and a return to a less accommodative policy stance – once the economic conditions are ripe – are essential for several reasons. First, because monetary policy accommodation for prolonged periods of time might fuel excessive risk-taking, leverage and asset price bubbles. Second, it might discourage banks, companies and governments from strengthening their balance sheets and therefore create a dependence on low rates.
Let me develop here how exit can take place. All the ECB’s crisis-response measures involving liquidity provision over long horizons share an important feature: credit is granted at a low but adjustable rate. We have already been explicit about the fact that the exact interest rate on long-term liquidity will be determined ex post, and be equal to the average policy rate prevailing over the life of the respective open market operation. We have also given banks the option of reversing the long-term repurchase operation in advance, after one year, if the conditions that had warranted the long maturity of central bank credit are no longer in place. In any case, we can withdraw the ample liquidity created as a side effect of the long-term operation whenever the Governing Council deems liquidity conditions are excessive in view of the outlook for price stability. All the tools necessary for large-scale liquidity withdrawal are already in place or will be readily available when needed.
This is consistent with our monetary policy strategy. It emphasises the monitoring of monetary and credit developments, which are linked to both financial imbalances and threats to price stability over longer horizons. It ensures a more symmetric policy with respect to financial misalignments and some “leaning against the wind” if monetary trends signal inflationary pressures over and beyond what standard conjunctural analysis and macroeconomic projects imply...[Continue]
Graphs from presentation:
Credit Risk Shocks:
Bond yield spreads are vis-à-vis the German 10-year government bond, end-of-day data (last value 16 Mar 2012, 17:00 CET).
Euro Area Corporate Bond Spreads:
Bonds with maturities of over one year are included in the indices. Benchmark is the EMU AAA government bond index calculated by Merrill Lynch. The last observation is dated 16 March 2012.