CBBH 3rd Research Conference
Challenges for Central Banks in Low Interest Rate Environment
Introductory speech by CBBH Governor
dr. Senad Softić, Sarajevo 05. November 2020.
Ladies and Gentlemen, Dear fellow central bankers,
It is my great pleasure to welcome you all at the 3rd research CBBH conference under the
title: Challenges for central banks in low interest rate environment.
I
s you know our first two research conferences were a success and we hope this one
will be as well. This conference is taking place in very special circumstances.
A
Unfortunately the impact of Covid-19 pandemic does not allow us to get together, show
our hospitality and beautiful town and the country. Let's hope that the next conference
will be held in better time. We believe it is important to keep this tradition to promote
the dialogue between policy makers and academic community on topics of special
relevance for the Central bank of Bosnia and Herzegovina.
II
This year, our focus is on low interest rate environment, and the challenges it brings for
the central banks in macroeconomic terms.
The decline in long-term risk free nominal interest rates started in the late 1990s.
Short-term nominal interest rates fell sharply after the crisis of 2007/ 2008 and have
remained at lower bound ever since.
With nominal rates at historically low levels, negative yields are recorded on some of the
sovereign debt of several Eurozone members. A flatter yield curve reduces the incentive
for banks to undertake maturity transformation. Liquidity is high, while the lending
activity, and in some cases economic activity, is not too impressive.
And on top of that, this year we are faced with devastating consequences of corona-virus
pandemic. In March and April the world economy has faced serious shock with lock down
of economies. IMF called it the Great Lockdown.
Both supply and demand collapsed and we all will be facing negative growth this year. It
is likely to have a long shadow on global economy, implying even greater challenges for
the central banks. The fiscal dominance arguments are bound to strengthen, as the
central banks are bound to increasingly rely on the non- conventional monetary policy
tools and instruments. At least those that have the legal mandates to do so.
Until recently it was conventional wisdom that when nominal interest rates are close to
zero we face so called liquidity trap and monetary policy cannot stimulate the economy
any more. Today as several major central banks are using negative interest rates we
know this is not true.
III
CBBH is not banking regulator and supervisor, but we do care about systemic financial
stability, therefore we need to follow all modern financial trends and be ready to have
an answer to those challenges. Within our monetary policy regime we took all possible
measures. Our first line of defense was to maintain credibility of the currency board via
continuous communication. When crisis erupted, some wanted us to abandon currency
board principles, finance directly companies and/or budgets, and start buying
government or corporate securities. In short print money without full currency board
coverage. But our Law on currency board is very strict. We simply are not allowed to do
any of such either conventional or unconventional monetary policy measures.
On top of communication our only instrument is reserve requirement, its rate and
remuneration policy. We monitored closely excess liquidity of banks and we will take
necessary measures if needed.
Interest rates in the banking system in BH followed Eurozone trends. So, lending and
deposit rates are declining. But only very marginally. During the first six months of this
year, average interest rate on new loans to households was 5.49% and 3 basis points
lower than in 2019. For new loans to non-financial companies, this rate was 3.26% and
16 basis points lower than previous year. Until the end of the year we do not expect major
changes on interest rates.
For us one of the main internal concerns of negative interest rates is our profitability in
the future. Most central banks and especially currency boards make their profits by
investing their assets to obtain yield on them. This is becoming more and more difficult.
With low and even negative rates on large parts of our assets central banks are put in
difficult position. Either take more risks on their assets and invest in riskier assets or
face very low or zero income on its assets.
IV
Even with the entire stimulus in the form of unorthodox monetary policy tools like
quantitative easing and negative rates based on historical standards the revival of world
economies has been slow. Combination of the aftermath of the Global financial crisis with
the pandemic have put us in the position of very low interest rates.
How long can this last?
Most central bankers today forecast low interest rates for several years. One of the
consequences of the ongoing pandemic is that long awaited normalization of the ECB
monetary policy is not likely to happen in short to medium run.
In the Eurozone inflation is still far below target regardless of measures taken by ECB. In
October recovery seems to be again slowing down, as second wave of the pandemic is on
the rise. ECB will keep its negative rates on its deposit facility for some time and will
continue with a lot of other unorthodox measures to stimulate the economy. In short, we
have to face such environment for at least the medium term.
V
I hope this conference, with carefully chosen papers to be presented today, will help us
to have better understanding of challenges in the current environment, and the nature of
linkages between monetary and fiscal policy. With a narrow conventional monetary
policy space and measures, growing public debt burden and narrowing fiscal space, we
are all facing challenging period ahead of us.
A better understanding of the sources of risks, roles, and limitations of public policies
will lead to an optimal policy mix, given the circumstances.
VI
As the agenda is long, our day is divided into two main panels.
The first part is entitled: Spillovers from the ECB's Non-standard Monetary Policy
Measures; Who's Afraid of Euro Area Monetary Tightening? It will be chaired by our chief
economist Belma Čolaković. We will listen to three papers from the ECB, Croatian and
Bulgarian national banks.
The afternoon panel: Monetary and fiscal policies effectiveness in low interest rate
environment will be chaired by Marko Škreb, from FINRA. Cases from Albania,
Macedonia and Turkey will be presented. So during the Conference we will be able to
listen to experiences from a broad geographical coverage as well as diverse central
banks, from small ones to ECB and Turkey. Hopefully this should enable us to draw some
general conclusions. Velimir Šonje from FINRA again will help us to extract some
takeaways with his final remarks.
VII
To close my remarks I would like first to express my special thanks and gratitude to all
that enabled this conference to happen: CBBH staff that prepared it (specially our Chief
Economist Ms. Belma), all the speakers and their contribution and audience for taking an
interest and being open to observing these pressing macroeconomic issues through,
perhaps, slightly different lenses.
CBBH has been cooperating for three fruitful years with FINRA project financed by USAID.
As Managing director of BiH USAID program Ms. Nancy Eslick will speak after me, I will
not use much time on this topic, but our thanks go to FINRA, Mr. Marko, David, Velimir and
Amil, and of course USAID.
I am looking forward to all the contributions and interesting discussions. Thank
you all once again.
Ms. Eslick, the floor is yours.