Joachim Wuermeling: Operational challenges in the implementation
of monetary policy in the euro area
Keynote speech by Prof Joachim Wuermeling, Member of the Executive Board of the Deutsche
Bundesbank, at the Official Monetary and Financial Institutions Forum (OMFIF) Lunch
discussion, London, 22 November 2017.
* * *
1 Introduction
Ladies and gentlemen,
Let's be honest: monetary policy implementation is not exactly an appealing lunch topic.
As a kind of reward for your audacity to come along regardless, I will focus my remarks on the
implementation of the Public Sector Purchase Programme (PSPP) as the main pillar of the
Eurosystem's asset purchases.
As a general reminder, I would like to mention that the question of how to implement purchases
of public sector securities is not the first question that monetary policymakers need to ask
themselves. The first question to be asked is whether such purchases should be implemented at
all. The Bundesbank has always been critical of government bond purchases in a monetary
union because purchases of this kind blur the boundary between monetary policy and fiscal
policy. In our opinion, government bond purchases should only be used as an emergency tool.
That is also why the Bundesbank has called for a clear PSPP expiration date.
I will argue in my remarks that the operational challenge for the Eurosystem is to ensure a
smooth implementation of the PSPP. Smooth implementation does not only mean achieving the
intended monthly purchase volume; it also means minimising negative side-effects on market
functioning. There have recently been some misconceptions in this regard. Finally, I will argue
that a smooth implementation of the PSPP does not mean rewriting the rules whenever
compliance would impose any kind of restrictions.
2 Ensuring a smooth implementation of the PSPP
2.1 Achieving the intended monthly purchase volume
So let's start with the first of two important elements of a smooth implementation of the PSPP:
achieving the intended monthly purchase volume.
The PSPP purchase volume has been very substantial since the inception of the Eurosystem's
asset purchase programme (APP). At present, overall Eurosystem holdings under the APP
amount to about 2.2 trillion euro at amortised cost. PSPP holdings amount to 1.8 trillion euro.
This means that the PSPP holds a share of about 80 per cent in the APP. When it comes to
country allocation in the PSPP, at the end of October 2017 a book value of 437 billion euro had
been purchased in German debt securities, 356 billion euro in French debt securities and 310
billion euro in Italian debt securities. The background is that the Eurosystem is guided by a capital
key allocation in terms of PSPP book value amounts per country.
By allocating purchases to each country in accordance with the ECB capital key, the
Eurosystem seeks to avoid the moral hazard that could arise as a result of purchasing a
disproportionately large amount of bonds issued by highly indebted governments.
If it is not possible to purchase the envisaged amount of bonds in a given country, the relevant
national central bank conducts so-called substitute purchases, consisting of bonds issued by
international organisations and multilateral development banks located in the euro area. This is to
ensure a smooth implementation of the national central banks' share of purchases throughout
the life of the APP.
To this end, the Governing Council of the ECB has also adjusted the parameters of the PSPP
along the way. These adjustments include decisions to
increase issue share limits from 25 per cent to 33 per cent (September 2015)
include bonds issued by regional and local governments located in the euro area (December
2015)
increase the issuer and issue share limit for EU supranational bonds from 33 per cent to 50
per cent (March 2016)
broaden the maturity range by decreasing the minimum remaining maturity for eligible
securities from two years to one year (December 2016)
permit to the extent necessary purchases of securities with a yield to maturity below the
ECB's deposit facility rate (December 2016)
In October, the APP was reviewed again by the ECB Governing Council in the regular
crosscheck of economic and monetary conditions in the euro area. As a result, the Governing Council
decided to recalibrate the APP. From January 2018, net asset purchases under the APP will be
reduced from a monthly pace of 60 billion euro to 30 billion euro. The ECB Governing Council
pointed out that this recalibration is due to improvements in the economic and monetary
environment in the euro area.
As far as alleged shortages are concerned, let me emphasise that, since the inception of the
PSPP, the Bundesbank has never faced and does not face difficulties in purchasing the intended
amounts of German government bonds on the secondary markets.
2.2 Minimising negative side-effects on market functioning
But there is more to a smooth implementation of the PSPP than just achieving the intended
monthly purchase volume. The Eurosystem at the same time has to minimise negative
sideeffects on market functioning. There have been some misconceptions in this regard of late.
In August, for instance, a German newspaper reported that the Eurosystem had deviated from
the capital key in the PSPP and had bought disproportionately large amounts of Italian
government bonds. The Eurosystem was, according to this article, using the purchase
programme as a tool to fight political risks. The newspaper referred to the Italian share of net
purchases in July, which - when measured against the capital key - had indeed been slightly
elevated.
Let me be very clear on this point: temporary, limited deviations are not a new phenomenon. In
fact, as some countries have been relying on the substitute purchases I have just mentioned to
achieve their intended volume, slight deviations do not come as a surprise. However, these
deviations are not a discretionary policy choice to support individual countries but are purely
mechanical. There are technical reasons for them.
With regard to the July purchases: In view of tighter liquidity conditions, the reinvestment of
proceeds from French bonds maturing in July 2017 was spread over several months. This
resulted in a temporary decline in the share of French bonds in net PSPP purchases and a
mechanical over-allocation for other jurisdictions in July - among them, Italy.
The PSPP's design - and the APP's design in general - allows for flexibility in its implementation
to limit the interference of bond purchases with the market's price formation mechanism and to
preserve market liquidity. The pattern of monthly purchases has reflected this flexibility.
Let me give you two other examples. First, in view of expected lower market liquidity in the
summer and towards the year-end, the Eurosystem frontloaded APP purchases, raising them
above the target for a number of months, while reducing them below target in August and
December. Second, in the day-to-day implementation of the programme, bond purchases are
also
responsive to signs of scarcity of individual bonds.
To be more transparent about key factors influencing the monthly gross purchase volume, the
Eurosystem recently started to publish the expected monthly redemption amounts for the APP.
This decision reflects the increasing relevance of reinvestments, given the higher redemption
amounts that will be seen in 2018. Principal redemptions on securities purchased under the
PSPP are reinvested by the Eurosystem in a flexible and timely manner in the month they fall
due, on a best effort basis, or in the subsequent two months. As in the case of July, the monthly
net purchase volume per jurisdiction may therefore fluctuate owing to the timing of these
reinvestments.
Again, the allocation of purchases across countries is clearly rules-based. Temporary deviations
are due to various - in part, even overlapping - technical reasons. These deviations reflect the
fact that we want to be as market-neutral as possible in our monthly purchases.
On a side note: Another instrument to support market liquidity is the Eurosystem's securities
lending. Bonds purchased under the PSPP have been made available since 2 April 2015, while
bonds purchased under the other programmes were added to the framework later.
2.3 No rewriting of the rules whenever compliance would impose any kind of restrictions
Ladies and gentlemen,
So far, I have explained to you what it means operationally to ensure a smooth implementation of
the PSPP. Namely, to achieve the intended purchase volume and at the same time to minimise
as far as possible negative side-effects on market functioning.
But it is equally important to consider what a smooth implementation of the PSPP does not
mean. Namely, to rewrite the rules whenever compliance would impose any kind of restrictions.
Apart from the detrimental impact this would have on our credibility and reputation, adherence to
our monetary policy mandate is at stake.
For instance, there has been talk of the flexibility of the issue share and issuer limit, and of
abandoning the capital key as a reference value for the allocation of the overall purchase volume
to bonds issued by euro area member states.
The limits relating to issue shares and issuers are important to prevent an awkward situation
from arising given that the Eurosystem has a crucial role in any sovereign debt restructuring that
may be deemed necessary. The Eurosystem would have to make use of its blocking minority in
order not to violate the prohibition of monetary financing.
As I mentioned earlier, by using the ECB capital key as a reference value, the Eurosystem
intends to avoid the moral hazard that could arise as a result of purchasing a disproportionately
large amount of bonds issued by highly indebted governments.
It is quite obvious that changes to these parameters - which the ECB Governing Council has set
itself for good reason - would take monetary policymakers deep into the realm of fiscal policy.
Government bond purchases blur the line between monetary and fiscal policy, and they have
made us the largest creditor of the euro area countries. This poses a threat to our independence.
Furthermore, if the capital markets are to encourage fiscal policymakers to embrace fiscal
prudence, it is vital that market mechanisms generally continue to function properly.
I believe that changing the parameters - which is sometimes discussed rather carelessly, in my
opinion - would have considerable negative repercussions for those mechanisms. A clear sense
of scepticism is also apparent in the German Federal Constitutional Court's decision to refer the
government bond purchase programme to the European Court of Justice.
3 Conclusion / Outlook
So let me recap my main points on the PSPP.
First, the Eurosystem has been successful in smoothly implementing the PSPP. Purchases will
be recalibrated as a result of improvements in the economic and monetary environment in the
euro area.
Second, temporary deviations from the capital key are not a discretionary policy choice to
support individual countries. They have purely technical reasons and reflect the fact that we want
to be as market-neutral as possible in our purchases.
Third, smooth implementation of the PSPP does not mean rewriting the rules whenever
compliance with the rules would impose any kind of restrictions. Abandoning the capital key as
reference value or increasing the limit for issue shares and issuers would take monetary
policymakers deep into the realm of fiscal policy - in my view, too deep.
Ladies and gentlemen,
In the last 15 minutes the focus was on the PSPP. But let's not get too carried away with this
instrument. I would warmly recommend that you take the trouble to broaden your view to the
other decisions by the ECB Governing Council, including private sector purchases,
reinvestments, forward guidance, targeted longer-term refinancing operations and, of course, key
rates. On aggregate, the monetary policy stance of the Eurosystem will remain highly
accommodative for a while yet.