Yves Nosbusch


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Unconventional monetary policies



The meeting of the Governing Council of the European Central Bank (ECB) on 5 June was a milestone for eurozone monetary policy. The ECB plunged into uncharted waters by unveiling a package of unconventional measures. Above all, it implicitly paved the way for using its last round of ammunition, namely large-scale bond purchases (Quantitative Easing).


Let's first take a look at the announced measures. In addition to cutting the refinancing rate again, the ECB took the landmark decision to introduce a negative interest rate on its deposit facility. It also announced that it would stop the sterilisation of the Securities Markets Programme. That decision is expected to release more than €150 billion of additional liquidity into the market. These measures have already started taking their effect on interbank rates, which fell significantly in the wake of the 5 June meeting. Also, and somewhat unexpectedly, the ECB's president made it clear that no further rate cuts are to be expected.


Another innovative measure announced on 5 June is the Targeted Long Term Refinancing Operations programme. TLTRO will allow eurozone banks to secure long-term financing (the loans come due in 2018) on favourable terms (the short-term refinancing rate plus a spread of 10 basis points). Going forward, however, the quantity of loans will be directly linked to the volume of credit that banks make available to the non-financial sector (excluding the public sector and home loans). The reason the ECB has targeted the loans in this way is to prevent banks from using borrowed funds to buy government bonds and also to avoid fuelling property bubbles in certain countries.

 monetary policies

The latter measure is reminiscent of the Funding for Lending (FLS) scheme set up in the UK in 2012, though there are some major practical differences. Specifically, the FLS did not exclude personal mortgages (until 2014) and, in practice, its main impact has been on mortgage financing, which has risen sharply in the UK. By contrast, it has had a lesser impact on business loans.


A final policy announcement concerned the acceleration of preparatory work for possible ECB purchases of asset backed securities (ABS). This would contribute to reviving the securitisation market, which in turn would help finance Europe's economic recovery.


In sum, the ECB will have tried everything in its power. If the measures announced on 5 June fail to rekindle inflation in the eurozone, then Quantitative Easing would seem like the only remaining option. In that case, even QE's harshest critics would be hard pressed to come up with an alternative.



Article completed on 19 June 2014 by Yves Nosbusch, Chief Economist of the Bank

Published on paperjam.lu (in French) on 19 June 2014