Reflections on monetary policy in the euro area
at the current juncture
Address by the Deputy Governor of the Bank of Italy
Luigi Federico Signorini
Bank of Italy workshop on
"Unconventional monetary policy: effectiveness and risks"
Rome, 21 October 2016
It is a pleasure to welcome you to the Banca d'Italia for this one-day workshop on
'Unconventional monetary policy: effectiveness and risks'. I understand that you have a
full agenda, with nine dense and thought-provoking papers packed into a single day. I
will keep my remarks very brief.
Your discussions today are sure to be policy-relevant and timely. The Governing
Council of the ECB has repeatedly asserted, most recently yesterday, that the asset
purchase programme (APP) will continue at the current pace of purchases until at least
March 2017, or possibly beyond if necessary, and in any case until the Governing
Council sees a sustained adjustment in the path of inflation consistent with its target.
Properly measuring the effects of the APP is therefore a priority for the euro area
monetary policymakers.
The Eurosystem's expanded APP has been in place for almost two years, exerting
clear and sizeable downward pressure on government bond and other financial asset
yields; these, in turn, have had favourable effects on private sector financing conditions.
Monetary policy on its own cannot produce growth. It can, however, create
favourable conditions for a cyclical upturn; it may facilitate the adoption of other
measures, such as structural reforms, by limiting the negative short-run impact that is
sometime associated with them.
As a joint outcome of the APP and the other extraordinarily expansionary
measures recently adopted by the Eurosystem, the cost of bank loans is now historically
low and, even more importantly, the dispersion of lending rates across countries is once
again close to the levels prevailing in the pre-crisis period. This helps to preserve the
integrity of the monetary union. Still, almost ten years after the onset of the financial
crisis and five years after the start of the sovereign debt crisis, the slack in the euro-area
economy persists.
A number of questions are being raised on the functioning of the expansionary
measures recently adopted by the Eurosystem. How does the transmission mechanism
work when the economy is at the lower bound of the interest rates? Might the working
of those measures be impaired after some time? What are the interactions with other
developments, such as commodity prices, financial regulation, legacy assets in banking,
and conditions in the world economy? Could specific monetary policy measures
adopted by the ECB weaken the transmission mechanism by negatively affecting banks'
profits and capital accumulation and hence lower the incentives for banks to engage in
lending activities?
Many factors are at work, and disentangling the impact of the APP from that of
other measures is of capital importance in informing the monetary policymakers'
decisions. Yet, it is no easy task; and that is why solid, in-depth analysis, looking at
these issues from different angles and with different tools, is surely needed. The first
part of today's workshop will provide several interesting papers which attempt at doing
that.
The second half will deal with another question that is being asked in the
monetary policy debate, namely whether the current, extraordinarily expansionary
monetary policy stance is inducing excessive risk-taking and thereby possibly igniting
tomorrow's financial crises.
Low interest rates and yields make investors inclined to search-for-yield and
embark on riskier investment strategies. Up to a point, this is not an unintended
consequence of the current monetary policy measures, but actually part of the hoped-for
transmission mechanism. Portfolio rebalancing is a key component of the mechanism
that is expected to transmit the APP to the real economy.
It is conceivable, however, that this may eventually go too far and the amount of
risk-taking induced by the Eurosystem's monetary policy exceeds what is optimal and
results in more costs than benefits. I do not think there is any evidence that this is
happening so far at the aggregate level. There are localized tensions, particularly in the
property market in certain member states; these need to be tackled, and are being
tackled, by macroprudential measures.
Opinions on the respective roles of monetary policy and macro prudential tools
differ, as is perhaps natural given that macro-prudential policy is still in its infancy;
more research on these topics is therefore welcome.
Looking at today's impressive collection of papers, I have no doubt that the
workshop will go a long way towards providing us with answers to many of the
questions I listed. I very much look forward to hearing about your findings and the
outcome of your discussions.
Before the presentations begin, I would like to thank all those that contributed to
Banca d'Italia
this workshop, both from the and from other national central banks of
ESCB or academia. I wish you all a most successful workshop, and a pleasant stay in
Rome and at the Banca d'Italia.