Non-standard monetary policy measures

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

Before the crisis, 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).

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 until December 2018.

Securities lending of holdings under the asset purchase programme (APP)

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.  

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 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.

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