EURO AREA ECONOMY AND MONETARY POLICY

03.04.2017ANETE KRAVINSKA

ECONOMIST IN BANK OF LATVIA

2

Saturs

The Eurosystem

Structure of the euro area economy

Global environment

Monetary policy implementation in the euro area

Monetary policy instruments

The impact of monetary policy decisions

1.THE EUROSYSTEM

4

♦ EURO AREA♦ OTHER EU COUNTRIES♦ UNILATERALLY ADOPTED EURO

Which countries use euro as their national currency?

5What is Eurosystem?

6

Source: ECB

Functions of the Eurosystem

Collect and centralize statistics

from national authorities and

economic agents

Issue bank notes in the Eurozone

International cooperation • Define and implement

monetary policy in the Eurozone

• Conduct foreign exchange operations

• Hold and manage the official foreign exchange reserves of each country

Contributes to the stability of the

financial system

MAIN FUNCTIONS Consultation of stakeholders

7

Source: ECB

ECB's primary objective – price stability

8

Each member of GovC has one wote, since 2015 there is rotation

ECB GovC meets once in 6 weeks to discuss the economic and monetary developments in order to take decisions

Source: ECB

Who is making decisions in euro area?

9

Where are the ECB

headquarters located?

a) Paris

b) Frankfurt

c) Brussels

d) Berlin

Question

2. STRUCTURE OF THE EURO AREA ECONOMY

11

Population (mn)

Source: Eurostat, IMF WEO, World Bank

Euro are on global scene

12

EA population by country(%)

Eurostat

75% of EA population come from Germany, France, Italy or Spain

13

World GDP, 2015 (%)

World Bank

Euro are on global scene

14

EA GDP by country, 2016 (%)

Eurostat

France and Germany contribute 50% to the GDP of the euro area

15

Value added in euro area by sector(%)

Eurostat

The largest sectors in euro area are public administration & defence and industry

16

GDP per capita 2015 (thousand USD)

World Bank

Euro are on global scene

17

GDP per capita (thousand EUR)

Eurostat

The levels of GDP per capita are very diverse across EA countries

Luxe

mbourg

Ireland

Netherlands

Austria

Finland

Germany

BelgiumFra

nce

Euro areaIta

lySp

ainMalta

Cyprus

Slove

nia

Portugal

Greece

Estonia

Slova

kia

Lithuania

Latvi

a0

10

20

30

40

50

60

70

80

90

100

20052015

18

World exports (%)

Source: World Bank

Euro are on global scene

19

Euro area export partners, 2016 (%)

Source: Eurostat

The largest EA export partners are USA, UK and China

20

Main product groups in euro area exports (%)

Eurostat

The largest export product group is machinery and transport equipment

21

Which of euro area countries has the highest GDP per capita?

a) Latvia

b) Switzerland

c) Luxembourg

d) Monaco

Question

3. GLOBAL ENVIRONMENT

23IMF predicts moderate growth in future

World GDP (yoy, %)

IMF

19901992

19941996

19982000

20022004

20062008

20102012

20142016

20182020

-4

-2

0

2

4

6

8

10

0

1

1

Forecast Developed countries Emerging countries

24Commodities' prices experienced big slump over 2014-2015, now are recovering

Global commodities prices (food (index), crude oil (USD/bar))

Bloomberg, Reuters* forecast based on futures contracts

0

500

1000

1500

2000

2500

0

20

40

60

80

100

120

140

160FoodCrude oil (rhs)

-70%

Jan-15Apr-1

5Jul-1

5Oct-

15Jan-16

Apr-16

Jul-16Oct-

16Jan-17

Apr-17

Jul-17Oct-

17-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

Actual data Forecast*

Crude oil price yoy (%)

25Euro has stabilized lately

EUR/ USD exchange rate and NEER 38 (NEER 99Q1=100)

Bloomberg

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 201780

85

90

95

100

105

110

115

120

125

130

0.6

0.8

1

1.2

1.4

1.6

1.8

NEER (38)

EUR USD

4. LATEST DEVELOPMENTS IN EURO AREA ECONOMY

27

Euro area GDP growth (yoy, %)

Source: Eurostat, ECB

Moderate recovery continues in euro area19

96

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

1.6

2.62.9 3.0

3.8

2.1

0.90.6

2.21.6

3.22.9

0.4

-4.5

2.11.6

-0.8-0.3

0.91.6 1.7

2017 2018 20190.0%

0.5%

1.0%

1.5%

2.0%

2.5%1.8%

1.7% 1.6%

March-2016 June-2016 Sept-2016Dec-2017 March-2017

ECB's EA GDP growth projections (%)

28

Contributions to real GDP y/y growth rate, p.p.

Source: Eurostat

Domestic demand continues to be the main driver of the euro area GDP growth

2013

Q1

2013

Q2

2013

Q3

2013

Q4

2014

Q1

2014

Q2

2014

Q3

2014

Q4

2015

Q1

2015

Q2

2015

Q3

2015

Q4

2016

Q1

2016

Q2

2016

Q3

2016

Q4

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0Net exports

Changes in inventories

Investment

Private consumption

Government consumption

GDP

29

Real GDP index, 2008Q1=100 Real GDP growth, %

Source: Eurostat, BoL calculations

Euro area has nearly returned to pre crisis level, Latvia has still some catching up to do

70.0

75.0

80.0

85.0

90.0

95.0

100.0

105.0

110.0

Euro areaGermanyGreeceSpainFranceItalyLatvia

2011 2012 2013 2014 2015 2016-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

1.6

-0.9-0.3

0.9

1.6 1.7

6.2

4.0

3.02.4

2.7 2.5

Euro area Latvia

30

Inflation in euro area (yoy, %)

Source: Eurostat

Inflation close to ECB's target, mainly due to base effects20

00

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

Inflation Core inflationECB target

ECB's inflation forecasts (yoy %)

2017 2018 20190.0%

0.5%

1.0%

1.5%

2.0% 1.7% 1.6% 1.7%

March-2016 June-2016 Sept-2016Dec-2017 March-2017

31

Now already all of the euro area countries have positive inflation rates

Source: Eurostat

Inflation in euro area countries, %, yoy

Belg

ium

Spai

n

Latv

ia

Esto

nia

Lithu

ania

Luxe

mbo

urg

Aust

ria

Germ

any

Euro

are

a

Fran

ce

Neth

erla

nds

Gree

ce

Slov

enia

Mal

ta

Port

ugal

Italy

Finl

and

Slov

akia

Cypr

us

Irela

nd

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.53.1

2.9 2.9 2.82.5 2.5

2.11.9 1.8

1.6 1.6 1.5 1.5 1.4 1.31.0 0.9 0.9

0.7

0.2

2016M112016M122017M01

32

Contribution to EA inflation by components, ppts

Source: Eurostat

Energy prices have had big impact on the inflation

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

Energy-forecast*

Services

Energy

NEIG

All items

33

Source: Eurostat

Without stronger rebound of growth, there is little chance for a substantial decline in unemployment rates

0.0

5.0

10.0

15.0

20.0

25.0

30.0

Euro areaGermanyGreeceSpainFranceItalyLatvia

Unemployment rate, %

34

General government debt, % of GDP

Greece Ita

ly

Portugal

Cypru

s

Belgium

Spain

France

Irelan

d

Austria

Slove

nia

German

y

Netherl

ands

Malta

Finlan

d

Slova

kia

Lithuan

iaLat

via

Luxembourg

Estonia

0

20

40

60

80

100

120

140

160

180

200177

133 129

109 106 99 96 9486 83

71 65 64 6353

43 3621

10

65

91

20072015EA '07EA '15

Source: Eurostat

The rapid increase in sovereign debt levels raises serious concerns about its sustainability and future economic growth

35

Fiscal balance, % of GDP

-16.0-14.0-12.0-10.0

-8.0-6.0-4.0-2.00.02.0

-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

0.0

-13.1

-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

-3.8

20092015

Source: Eurostat

Budget deficit is still close to or above the 3% threshold in several euro area countries

36

What is the main factor impacting inflation levels in the euro area recently?

a) ECB monetary policy

b) Drop in service prices

c) Lack of structural reforms

d) Global oil price developments

Question

5. MONETARY POLICY IMPLEMENTATION IN THE EURO AREA

38

Source: ECB

Monetary policy in the euro areaMonetary policy target

Price stabilityInflation close but below 2%

Standart instruments Non-standart instruments

Deposit/lending facility

Requirements on reserves

MRO, LTRO Asset buying programs

(EAPP)

Additional liquidity support

Forward guidance

39

Source: ECB

Provide liquidity

Provide collateral

Eurosystem

Banks

€ €Return collateral

Return borrowed money+%

Eurosystem

Banks

€ %+€ %+

1. 2. Refinancing operations

40

Main policy rates (% p.a.)

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 20170.0%

100.0%

200.0%

300.0%

400.0%

500.0%

600.0%

700.0%

ECB Fed BoJ BoE

Source: Bloomberg

Since 2009 world’s major central banks have kept rates close to zero

41

Main policy rates in Eurosystem (%)

Source: ECB

On June 2014 ECB became the first major central bank to introduce negative rates

-1 %

0 %

1 %

2 %

3 %

4 %

5 %

6 %

Deposit rate MRO Lending rate

→ Stabilize the price level in the monetary union

→ Enhance the monetary transmission mechanism

→ Lower the short term rates in the euro zone interbank market

→ Promote credit to the real economy

42Main monetary policy decisions since 2014

Sep -2014Jun - 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%

TLTRO (up to 4 years)

Private sector asset purchases (ABS, CBPP3)

Public sector asset purchases (PSPP)

extend PSPP till march 2017

CSPP

expand PSPP

TLTRO II

MRO

Depo

Dec-2016

extend PSPP till end 2017

0.00%-0.4%

Source: ECB

43

Source: ECB, BBC

How does the EAPP work?

Euosystem buys securities…

1. 3.

2. 4.

5.

…allowing companies and HHs to borrow more…

… % rates go down… …supporting the spending…

…stimulating the economy and GDP

44

Source: ECB

82% of EAPP have been made in the public sector

PSPP to date

€1'762 bn

13%

1%

73%

9%4%

CBPP3ABSPPGovernment secu-ritiesSupranational secu-ritiesCorporate

45

Central bank balance sheets - % of GDP*

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 20160%

1000%

2000%

3000%

4000%

5000%

6000%

7000%

8000%

9000%

10000%

USUKEAJapan

*For BoE – last reported BS values at February 2015, since then BS value assumed to be constantSource: Reuters, Fathom Consulting, BoL calculations

Euorsystem's balance sheet to GDP has reached the size of Fed, still far from Japan

46

What is the ECB's primary objective?

a) Price stability in medium term

b) Sustainable growth in the long term

c) Enlarging the euro area

d) Low interest rates

Question

6. The impact of monetary policy decisions

48

Source: ECB, Bloomberg

Money market rates at historic lows, in negative territory

Eurosystem’s excess liquidity and money market interest rates (€ bn, % p.a.)

-1,400 bn

-1,200 bn

-1,000 bn

-800 bn

-600 bn

-400 bn

-200 bn

0 bn

200 bn

400 bn

600 bn

800 bn

1,000 bn

1,200 bn

1,400 bn

-40.0%

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

Excess liquidity (lhs)EoniaEuribor 3mEuribor 6m

49

10y government bond yields (%)

2009 2010 2011 2012 2013 2014 2015 2016 2017-500%

0%

500%

1000%

1500%

2000%

2500%

3000%

3500%

4000%

Italy

Portugal

Greece

France

Germany

USA

Spain

ECB lowers interest rates and announce non-standart stimulus

Source: Bloomberg, ECB

APP has provided huge financing relief for governments

ECB announce and start APP

50

Euro area AAA yield curve over time (% p.a.)

3M 6M 9M 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y-100.0%

-50.0%

0.0%

50.0%

100.0%

150.0%

200.0%

250.0%

min 3 years ago March-2017

Source: BloombergThe EA Yield curve based on Fitch AAA- rated government bonds (currently: Germany, Luxembourg, Netherlands)

EA yield curve close to historic lows

51

EUR/USD and NEER38(NEER 99Q1=100)

Source: Bloomberg

80

85

90

95

100

105

110

115

120

125

130

0.6

0.8

1

1.2

1.4

1.6

1.8

NEER (38)

EUR USD

Jan-13Apr-1

3Jul-1

3Oct-

13Jan-14

Apr-14

Jul-14

Oct-14

Jan-15Apr-1

5Jul-1

5Oct-

15Jan-16

Apr-16

Jul-16

Oct-16

Jan-1795

100

105

110

115

120

1

1.05

1.1

1.15

1.2

1.25

1.3

1.35

1.4

1.45

NEER (38)

EUR USD

ECB lowers interest rates and announce non-standart stimulus ECB announce

and start APP

Divergence in monetary policy stance is having an impact on exchange rates

52

USA, European and World stock market indices (Index: 01.01.2008=100)

2008 2009 2010 2011 2012 2013 2014 2015 2016 201740

60

80

100

120

140

160

180

USA S&P 500 MSCI World Eurostoxx 50

Source: Bloomberg, BoL calculations

Post-APP stock indices rallied, recently – more global uncertainty – markets are volatile

ECB lowers interest rates and announce non-standart stimulus

ECB announce and start APP

53

Nominal MFI bank lending rates to NFCs in selected euro area countries, new business (% p.a.)

Source: ECB

NFC lending rates at historic lows

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 20170%

100%

200%

300%

400%

500%

600%

700%

800% DEEEESFRITLTLVNLPTEA

EA lending rate

1.6%

ECB lowers interest rates and announce non-standart stimulus

54

Nominal MFI bank lending rates to HHs for house purchase in selected euro area countries, new business (% p.a.)

Source: ECB

HHs lending rates at historic low

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 20170%

100%

200%

300%

400%

500%

600%

700%

800% DEEEESFRITLTPTEA

EA lending rate

1.8%

ECB lowers interest rates and announce non-standart stimulus

55

MFI lending to NFCs and HHs (annual growth rate, %, s.a., adjusted for sales and securitisation)

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

HHs NFCs

Source: ECB

Lending to the private sector has recovered since the introduction of non-standard measures

ECB lowers interest rates and announce non-standart stimulus

56

Which of the following is true?a) Eurosystem monetary policy has had no impact on the real economyb) ECB has intentionally weakened the euro exchange rate to increase the

competitiveness of the economyc) Although due to the monetary policy response some economic variables have

improved, in order to achieve a sustainable growth in longer term responsible fiscal policy and structural reforms are needed

Question

57

Thank you for your attention!

Disscussion Questionnaire

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domas attīstību.

Tēmas: piedāvāts plašs makroekonomisko tēmu loks, kas aplūkojamas Latvijas, Baltijas

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59

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Pētījumi

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