Non-standard monetary policy measures

Eurosystem has taken a number of non-standard measures complementing its regular operating framework. 

Before the financial turmoil, the Eurosystem used to provide a pre-set amount of credit to banks through open market operations conducted through tender procedures, in which banks put up adequate collateral to guarantee the loans. Banks would also lend to and borrow from each other in the interbank market to meet their liquidity needs.

The turmoil in international money and capital markets triggered by the financial crisis affected banks in the euro area as well, which faced a lack of liquidity already from early August 2007. There were also dysfunctions in money markets. Thus, the Eurosystem decided to introduce several non-standard monetary policy measures, as described below, which have responded to the challenges posed by the different phases of the crisis.

In the first phase of the crisis, amid a lack of liquidity and dysfunctions in money markets, banks were reluctant to lend to each other in the interbank market due to a perceived increase in counterparty credit risk. Against this background, the primary aim of the Eurosystem’s non-standard measures was to provide liquidity to banks and to keep financial markets functioning.

During that first phase of the crisis, the Eurosystem decided:

  • to adopt a fixed-rate full allotment tender procedure for open market operations (since October 2008);
  • to extend the maturity of open market operations (through six-month longer-term refinancing operations and three  one-year operations) and to conduct complementary three-month open market operations; and
  • to expand the range of eligible assets that could be used as collateral in refinancing operations.

In the second phase of the crisis, which took the form of a sovereign debt crisis, the Eurosystem’s non-standard monetary policy measures aimed to address markets’ malfunctioning to reduce dispersion in financing conditions faced by businesses and households in different euro area countries.

In the second phase of the crisis, the Eurosystem:

  • conducted the Securities Markets Programme (SMP) and intervened in the secondary market by purchasing government bonds issued by certain countries (from May 2010 to September 2012);
  • purchased eligible covered bonds under its Covered Bond Purchase Programme − CBPP1 (July 2009-June 2010) and CBPP2 (November 2011-October 2012);
  • carried out two Very Long-Term Refinancing Operations (VLTROs) with a maturity of three years (December 2011-February 2015);
  • announced, in September 2012, Outright Monetary Operations (OMT), i.e. purchases of government bonds subject to strict conditionality. The programme has never been activated.

In the third phase of the crisis, the Eurosystem's non-standard measures were aimed to address the risk of deflation. With short-term interest rates already close to zero, the non-standard measures were intended to influence the whole constellation of interest rates that are relevant for financing conditions in the euro area.

The non-standard measures during the third phase of the crisis included:

  • a negative interest rate on the deposit facility (since June 2014),
  • Targeted Longer-Term Refinancing Operations (TLTROs), designed to support bank lending to businesses and households. The first series of operations (TLTRO I) was announced in June 2014, the second (TLTRO II) in March 2016 and the third (TLTRO III) in March 2019;
  • forward guidance, which means communicating how the ECB expects its policy measures to evolve in the future and what conditions would warrant a change in the policy stance (since July 2013); and
  • the expanded asset purchase programme (APP).

The spread of the coronavirus (COVID-19) in early 2020, has been a major shock to the growth prospects of the global and euro area economies. In the face of economic disruptions and heightened uncertainty in money markets the Eurosystem decided on a comprehensive package of monetary policy measures. Together with the monetary policy stimulus already in place to counter the financial crisis, these measures aim to the smooth provision of credit and better access to funds for those hardest-hit by the spread of the virus like households and small to medium-sized firms. To succeed in its scope, ECB made borrowing easier to banks by keeping its key interest rates at historically low levels, by initiating new refinancing operations and at the same time expanding the list of assets that banks can bring as collateral to get refinancing, and by increasing asset purchases to help boost spending and investments.

The non-standard measures during the pandemic included:

  • additional longer-term refinancing operations (LTROs) to provide immediate liquidity support at favourable terms to the euro area financial system, followed by a new series of pandemic emergency longer-term refinancing operations (PELTROs) to preserve the smooth functioning of money markets during the pandemic,

  • the application of considerably more favourable terms during the period from June 2020 to June 2022 to all outstanding TLTRO III operations, with the aim to support bank lending to those affected most by the spread of the coronavirus, in particular small and medium-sized enterprises,

     

  • a temporary envelope of additional net asset purchases of €120 billion until the end of 2020, within the existing asset purchase programme (APP) of net purchases up to €20 billion per month, ensuring a strong contribution from the private sector purchase programmes. This envelope will further support favourable financing conditions for the real economy in times of heightened uncertainty,

     

  • a new temporary asset purchase programme of private and public sector securities the Pandemic Emergency Purchase Programme (PEPP) with an overall envelope of €1.850 billion until at least the end of March 2022, to counter the serious risks to the monetary policy transmission mechanism and the outlook for the euro area posed by the outbreak of the coronavirus. It is noted that the new PEPP includes the purchase of securities issued by the Greek government,

     

  • the adoption of collateral easing measures to ensure that counterparties continue to be able to make full use of Eurosystem liquidity support,

     

  • the enhancement of existing swap lines with central banks across the globe to ease strains in global funding markets and preserve financial stability.


 

Pandemic Emergency Purchase Programme (PEPP)

The ECB’s pandemic emergency purchase programme (PEPP) is a non-standard monetary policy measure initiated in March 2020 to counter the serious risks to the monetary policy transmission mechanism and the outlook for the euro area posed by the coronavirus (COVID-19) outbreak. This programme complements the asset purchase programmes we have had in place since 2014.
  
The ECB’s pandemic emergency purchase programme (PEPP) is a non-standard monetary policy measure initiated in March 2020 to counter the serious risks to the monetary policy transmission mechanism and the outlook for the euro area posed by the coronavirus (COVID-19) outbreak. This programme complements the asset purchase programmes we have had in place since 2014.
The PEPP is a temporary asset purchase programme of private and public sector securities. The Governing Council decided to increase the initial €750 billion envelope for the PEPP by €600 billion on 4 June 2020 and by €500 billion on 10 December 2020, for a new total of €1,850 billion. PEPP expansion will further ease the general monetary policy stance, ensuring that all sectors of the economy can benefit from supportive financing conditions that enable them to absorb this shock. This applies equally to households, firms, banks and governments.
All asset categories eligible under the existing asset purchase programme (APP) are also eligible under the PEPP, as well as a waiver of the eligibility requirements has been granted for securities issued by the Greek Government. In addition, the Governing Council decided to expand the range of eligible assets under the corporate sector purchase programme (CSPP) to non-financial commercial paper, making all commercial papers of sufficient credit quality and remaining maturity of at least 28 days, eligible for purchase under CSPP. All kinds of purchases help boost spending and investment, with the aim of supporting economic growth.
Purchases under PEPP are conducted in a flexible manner over time, across asset classes and among jurisdictions, on the basis of market conditions. The flexibility of purchases will contribute to effectively stave off risks to the smooth transmission of monetary policy to the real economy. Finally, the maturing principal payments from securities purchased under the PEPP will be reinvested until at least the end of 2023

Expanded asset purchase programme

To address the risks of a too prolonged period of low inflation, the Governing Council of the ECB introduced the expanded asset purchase programme.

To address the risks of a too prolonged period of low inflation, the Governing Council of the ECB introduced the expanded asset purchase programme.

This programme includes:

  • The asset-backed securities purchase programme (ABSPP). Purchases under the ABSPP started in November 2014.
  • The third Covered Bond Purchase Programme (CBPP3). Purchases under the CBPP3 started in October 2014.
  • The Public Sector Purchase Programme (PSPP), encompassing marketable debt instruments issued by central governments, agencies and international or supranational institutions located in the euro area. Purchases under the PSPP started in March 2015.
  • The Corporate Sector Purchase Programme (CSPP). Purchases under the CSPP started in June 2016.

The decision on the expanded APP was taken by the ECB Governing Council in an environment in which most of the indicators of actual and expected inflation in the euro area had moved towards their historic lows. Private and public asset purchases provide monetary stimulus to the economy at a time when the ECB’s key interest rates have reached their effective lower bound. They also lead to a further easing of monetary and financial conditions, reducing the cost of access to bank credit for businesses and households. This tends to support investment and consumption and ultimately helps bring inflation back to levels of below but close to 2%.

The Bank of Greece has participated in CBPP3 since the launch of the programme. It has also participated in the PSPP, purchasing bonds issued by development banks and supranational institutions located in the euro area.

Net purchases under the expanded APP ended in December 2018. The total stock of assets acquired by the Eurosystem at the end of the expanded APP is shown in the table below:

Eurosystem holdings under the asset purchase programme (as of end-December 2018)

Programme Holdings(in EUR millions)

ABSPP

27,518

CBPP3

262,201

CSPP

178,050

PSPP

2,102,048

Total APP

2,569,817

Since January 2019, and for as long as the ECB Governing Council deems necessary, the Eurosystem has been implementing a policy of reinvesting the principal payments from maturing securities purchased under the asset purchase programme.

In November 2019 the Governing Council announced the restart of net purchases under the programme of €20 billion per month, which expects to run for as long as necessary to reinforce the accommodative impact of its policy rates, and to end shortly before it starts raising the key ECB interest rates.

In March 2020, after the coronavirus outbreak, a temporary envelope of additional net asset purchases of €120 billion was added to the existing asset purchase programme (APP), until the end of the year, to support favourable financing conditions for the real economy in times of heightened uncertainty

 



Securities lending of holdings under the asset purchase programme (APP) and pandemic emergency purchase programme (PEPP)

Securities purchased under the public sector purchase programme (PSPP) have been made available for securities lending in a decentralised manner by Eurosystem central banks since 2 April 2015.

Securities purchased under the public sector purchase programme (PSPP) have been made available for securities lending in a decentralised manner by Eurosystem central banks since 2 April 2015.

Securities purchased under the SMP and meeting the eligibility criteria of the PSPP are also available for lending. 

Several Eurosystem central banks make their holdings under the three covered bond purchase programmes (CBPP, CBPP2 and CBPP3) available for securities lending. As of 18 July 2016, holdings under the corporate sector purchase programme (CSPP) have also been made available for securities lending by the purchasing national central banks. 

In addition, from 26 March 2020, securities purchased under the PEPP (Pandemic Emergency Purchase Programme) are also available for lending by the Eurosystem central banks.

The aim of securities lending is to support bond and repo market liquidity without disrupting normal repo market activity.

The Bank of Greece makes the securities purchased under the PSPP and the SMP and from the PEPP those that are also eligible under the PSPP available for securities lending via the Fails mitigation programme (Automatic Securities Lending) and Agency Lending (GC Access) Programme of Euroclear Bank SA. 

What does the asset purchase programme contribute to?

The Eurosystem has a clear mandate to maintain price stability. 

The Eurosystem has a clear mandate to maintain price stability. This programme will help to bring inflation back to levels in line with the Eurosystem's objective.

But it will also help businesses across euro area to enjoy better access to credit, boost investment, create jobs and thus support overall economic growth, which is a precondition for inflation to return to and stabilise at levels close to 2%. 

Is the asset purchase programme monetary financing?

The Eurosystem strictly adheres to the prohibition on monetary financing by not buying in the primary market. 

The Eurosystem strictly adheres to the prohibition on monetary financing by not buying in the primary market. The Eurosystem will only buy bonds after a market price has formed. This ensures that the Eurosystem does not distort the market pricing of risk.

Outright purchases of marketable instruments are explicitly mentioned as a monetary policy instrument (in Article 18.1 of the Statute of the ESCB). This includes the possibility to purchase instruments such as government bonds, as long as they are bought on the secondary market from investors and not on the primary market, i.e. directly from Member States.

Is the ECB the only central bank conducting asset purchases?

Many central banks have used outright purchases as part of their monetary policy. 

Many central banks have used outright purchases as part of their monetary policy. This practice, also known as quantitative easing or QE, has been employed by the Federal Reserve Board, the Bank of England and the Bank of Japan.

Outright purchases become useful when policy interest rates cannot be reduced any further. They can help central banks to fulfil their mandate, which in the case of the ECB is maintaining price stability, and thereby supporting economic growth and the creation of jobs.

Is the asset purchase programme aimed at helping specific countries?

The programme is designed to push inflation and inflation expectations
The programme is designed to push inflation and inflation expectations back to levels closer to the Eurosystem’s objective in the euro area as a whole. It does not reduce the debt of any particular country.

How does the asset purchase programme work and how does it benefit the economy?

Purchases under the programme influence broader financial conditions and, eventually, economic growth and inflation, through two main channels: direct pass-through and portfolio rebalancing.

Purchases under the programme influence broader financial conditions and, eventually, economic growth and inflation, through two main channels: direct pass-through and portfolio rebalancing.

Direct pass-through

When the ECB buys private sector assets, such as asset-backed securities and covered bonds, which are linked to loans that banks grant to households and firms in the real economy, the increased demand for these assets drives up their prices. This encourages banks to make more loans, which they can then use to create and sell more asset-backed securities or covered bonds. The increased supply of loans tends to lower bank lending rates for companies and households, improving broader financing conditions.

Portfolio rebalancing

The Eurosystem has purchased private and public sector assets from eligible counterparties that are financial institutions. The latter may choose to take the funds they receive in exchange for assets sold to the central bank and invest them in other assets. 

By increasing demand for assets more broadly, this mechanism of portfolio rebalancing pushes prices up and yields down, even for assets that are not directly targeted by the APP. This results in reduced costs (the effective market interest rate) for companies seeking to obtain financing on the capital markets. At the same time, the compression of yields on securities encourages banks to lend to companies or households. The increased supply of bank lending to the real economy tends to lower the costs of borrowing for households and firms. By lowering funding costs, asset purchases can stimulate investment and consumption. More dynamic demand from both firms and consumers will eventually contribute to returning inflation to below, but close to, 2% over the medium term.


Documents


This website uses cookies for the optimization of you user experience. Learn More
I Accept