peter praet : current issues of monetary policy speech by mr peter praet, member of the executive board of the european central bank, at the 8th kiel institute summer school on economic policy “ reassessing monetary policy ”, kiel, 3 july 2014. * * * i would like to thank jan felix hammermann and arthur saint - guilhem for their contribution in the preparation of this speech. dear president snower, dear professor lehment, ladies and gentlemen, it is a real pleasure to be here with you today. this year marks the centenary of the kiel institute for the world economy. over the past 100 years, the kiel institute has contributed thoughtfully to the debates on the most pressing economic policy issues in germany, europe and the global economy. it has become one of the leading independent think tanks in the world. you chose a truly interesting – and challenging – topic for this year ’ s summer school : reassessing monetary policy. over the past six years monetary policy has been firmly in the spotlight – more than central bankers are normally used to. the financial crisis has had important consequences for central banks and monetary policy. in particular, financial stability considerations are far more present in central banks today. still “ re - assessing ” sounds in my view somewhat too strong. i would argue that the principles of sound monetary policy remain largely unchanged. what has changed, in particular, is the environment in which monetary policy is operating and the measures that are needed to combat risks to price stability. my predecessor, otmar issing, has dubbed this a “ lost paradise ”. 1 if you recall, in the years preceding the start of the crisis, at the time of the so - called “ great moderation ”, there was a widespread impression that monetary policy had become an easy job. central banks had managed to win the battle against inflation, and the victory was seen as permanent. low and stable inflation, in addition, was seen as a sufficient condition to contain cyclical fluctuations in the real economy. while low inflation has proven a stable asset, the expectation that the macroeconomy could grow along a steep and uninterrupted path has been proven too optimistic. we have discovered that what we thought to be paradise was in fact – at least to some extent – an illusion. does this mean that central banks were left without resources when the crisis erupted? certainly not! on the contrary, central banks ’ actions were decisive in addressing many challenges raised by the crisis. the

following the developments taking place as regards the shrinking number of panel members for establishing euribor and eonia rates. given the authorities ’ commitment to addressing the shortcomings revealed in the rate - setting process, it is in the interest of markets that banks remain in the panel while the regulatory framework is being amended and behave as responsible market participants, thus preventing potential disruption in the functioning of an important financial market segment. related to the shift of money market transactions to the secured segment is the use of central counterparties ( ccps ). 8 in 2012, ccp repo transactions accounted for 55 % of all repo transactions ( up from 50 % in 2010 ). in addition to the use of ccps, triparty repo 9 has become more important. triparty repo accounted for 11 % of all repo transactions in 2012 ( up from 9 % in 2010 ). i will come back to ccps and triparty repo later on, but would first like to say some words on collateral and haircuts. collateral of course is intended to hedge default risk, while haircuts are usually seen as being intended to hedge the risk on that collateral. in times of market stress however, large and sudden margin increases can create self - reinforcing, pro - cyclical spirals of increasing weakness, exacerbate market swings and oblige market dealers to provide collateral to see ecb money market survey : http : / / www. ecb. int / pub / pdf / other / euromoneymarketstudy201212en. pdf? 4261e943bbcfec98572319740bda877b a ccp is an entity that interposes itself between the buyer and the seller of a repo, thereby reducing counterparty risk for both seller and buyer as long as the ccp itself is well diversified and well governed. under triparty repo, a central securities depository ( csd ), an international csd or a custodian bank, for example, acts as a facilitator between the buyer and the seller of a repo. the triparty agent handles the related collateral management, including valuation and substitution as well as re - use of the collateral with a central bank where possible. bis central bankers ’ speeches support secured transactions just when it is most costly to do so. two examples come to mind. first, when the sovereign debt crisis intensified, haircut