Welcome address by Bank of Greece Governor Yannis Stournaras at the 5th ECB Simulation Conference by Get Involved
10/12/2021 - Speeches
It is a great pleasure for me to be here today to address the opening of the fifth European Central Bank Simulation Conference. I would like to thank all participants for their interest in central banking, as well as the student group “Get Involved” for the excellent organisation of the conference.
I would like to start by stressing that the pandemic, two years after its outbreak, is still threatening lives, causing high uncertainty and weighing on the social well-being of all citizens around the world. Of course, progress on vaccinations has been a key factor in containing the pandemic and has contributed to the lifting of social distancing measures and the reopening of the economy.
However, we cannot yet say confidently that we are out of the woods. There is still a high risk of new, serious variants emerging, such as “Omicron”, with which we are currently confronted; it could lead to new pandemic waves with severe implications for both society and the world economy, including the euro area.
There is definitely no room for complacency. All competent authorities need to be vigilant to effectively manage the impacts of the pandemic. It is indispensable that they continue taking measures to restore financial well-being and promote social cohesion for all euro area citizens.
Turning to monetary policy, I would like to stress that the Eurosystem is now better prepared than before to fulfil its primary objective of maintaining price stability, so as to safeguard the value of the euro and to support economic growth and job creation.
Last July, the Governing Council concluded the ECB’s monetary policy strategy review. The review, launched in January 2020, took into consideration the fundamental changes that have taken place in the international economic environment since the last strategy review in 2003. Such changes include the fall in the so-called natural rate of interest, which limits the scope for conventional interest rate policy by central banks, as well as slowing productivity growth and a declining active population due to continuous population ageing. In addition, developments such as climate change, globalisation, rapid digital transformation and the rise of digital currencies affect the functioning of the markets and price developments, posing new challenges for central banks.
During the deliberations of the Governing Council, many analyses and studies prepared by Eurosystem working groups were submitted to us for consideration. These studies have been published in the ECB’s Occasional Papers series and I urge you to read them, as they examine a multitude of topics pertaining to the conduct of monetary policy.
Furthermore, the ECB and all the national central banks of the Eurosystem, in their effort to heed the views and expectations of the wider public, held events with the participation of representatives of civil society. At the Bank of Greece, we had the opportunity at the Simulation Conference in December 2020 to find out the views of the participants on a number of questions on prices, the economy and their expectations from the central bank. Also, in February 2021, we hosted the event “The Bank of Greece Listens”, which gathered representatives of social organisations with a view to discussing matters of concern and promoting a better understanding of the role of monetary policy. A summary of all the views and opinions expressed was taken into consideration by the Governing Council during the review of the ECB’s monetary policy strategy.
The new strategy sets out the basic principles that guide us in shaping the monetary policy stance, so that we can respond more effectively to various circumstances in order to achieve our primary objective of maintaining price stability. At the same time, the strategy provides a clear anchor for steering expectations of consumers and businesses about the future price level, allowing them to make informed economic decisions.
I will now turn to the most essential conclusions of the review.
To begin with, the new strategy stipulates that price stability is best maintained by aiming for 2% inflation over the medium term. Compared with the previous formulation that aimed for inflation levels of below, but close to, 2%, the new approach provides now clarity that the 2% level should not be interpreted as an acceptable ceiling on the inflation aim, but as our symmetric target. Inflation deviations from the above target, both negative and positive, are equally undesirable.
Redefining price stability reflects the need to set a fairly large positive buffer as regards the inflation level that is considered desirable. The experience gained from the recent crises highlights the need to set a higher inflation target, so as to provide monetary policy with greater space for interest rate cuts in the event of deflationary pressures and to avoid episodes where nominal interest rates are constrained by the effective lower bound. Additional factors taken into account in determining the inflation target include cross-country differences in inflation levels, downward nominal wage rigidities and a measurement bias in the Harmonised Index of Consumer Prices (HICP).
Adopting a symmetric target helps to appropriately steer expectations about the future levels of policy rates and inflation. Formerly, there was a widespread perception that the ECB would tighten its monetary policy in the event of upward inflation deviations, while, on the contrary, it would react with timid and delayed steps to downward deviations. In the current strategy, we underline that a continuous rise, as much as a prolonged fall in prices, should be immediately curtailed to the largest possible extent.
Furthermore, in the new strategy we acknowledge that, when the economy is close to the effective lower bound on nominal rates, this requires especially forceful or persistent monetary policy measures in order to avoid negative deviations from the inflation target becoming entrenched. This may also imply a transitory period during which inflation stands moderately above the 2% target.
Therefore, although it is confirmed that interest rate policy is still the primary tool of monetary policy, the ECB uses additional monetary policy tools when necessary. Such tools are forward guidance, asset purchases and longer-term refinancing operations.
During the previous crises, but also over the pandemic, the ECB resorted to non-standard, less conventional measures, as monetary policy rates had reached historically low levels. Let me remind you that the current levels of ECB interest rates have been set at zero since March 2016 for the main refinancing operations and at negative levels since June 2014 for deposits held by credit institutions with central banks. The combination of measures taken was particularly successful, as they played a decisive role in raising inflation and economic growth from the very low levels where they stood.
These measures continue to be in place until today in order to reinforce economic growth and support the stabilisation of inflation at levels consistent with the target. Furthermore, they manage to maintain smooth financial conditions across euro area economies, to ensure favourable financing conditions and to safeguard the flow of credit to all economic sectors.
In particular, during the pandemic, asset purchases by the Eurosystem under the Pandemic Emergency Purchase Programme (PEPP) played a key role in smoothing out financial shocks and providing additional monetary accommodation. This programme was launched immediately after the onset of the pandemic and, as announced on 10 December 2020, monthly net purchases will continue to be conducted at least until the end of March 2022 and, in any case, until we judge that the pandemic crisis is over. It is deemed very effective in holding back the rise, owing to high uncertainty, in sovereign bond yields, and the spreads between them. At the same time, it ensures the smooth functioning of the monetary policy transmission mechanism across euro area countries.
The effectiveness of the programme is mainly due to the innovative flexibility in the composition of asset purchases by the Eurosystem. The purchase volumes may vary over time depending on the prevailing financial conditions. Also, it is possible for the benchmark allocation of public sector securities to deviate temporarily from the key for subscription to the ECB’s capital of each national central bank (which is calculated according to the size of its country’s economy).
Under the temporary PEPP, a waiver of the minimum credit quality requirements, applicable under the regular Public Sector Purchase Programme (PSPP), was granted for securities issued by the Greek government; this helped to contain the effects of the pandemic on financial conditions in Greece.
During the pandemic, the measures adopted before its onset continue to be applied. More specifically, net purchases of securities under the regular expanded Asset Purchase Programme, launched in 2015 in response to the then financial crisis, continue to be conducted. The bulk of purchases is made up of government bonds under the PSPP. According to the decision taken on 12 September 2019, monthly net purchases are expected to run for as long as necessary to reinforce the accommodative impact of the policy rates, and to end shortly before the Governing Council decides that it is necessary to start raising the key ECB interest rates.
At the same time, the Eurosystem provides ample liquidity to banks through its monetary policy operations. Specifically, the terms of the third series of Targeted Long-Term Refinancing Operations (TLTRO III) are particularly favourable, in order to support bank lending to firms and households and to ensure low borrowing costs for the private sector. In order to facilitate banks to participate in the refinancing operations, on 7 April 2020 it was decided to ease the conditions for the eligibility of securities put forward by banks as collateral in the refinancing operations and to accept Greek government bonds as collateral in monetary policy operations.
In more detail, the value of debt securities held by the Eurosystem under the APP and the PEPP exceeds, as at end-November 2021, €4.6 trillion. In the same vein, the liquidity provided through refinancing operations amounts in aggregate to €2.2 trillion. Therefore, the size of the Eurosystem’s balance sheet has grown from about €4.7 trillion in early 2020 to almost €8.5 trillion in November (over the same period, the balance sheet of the Bank of Greece has increased from around €110 billion to about €230 billion).
To summarise, during the deliberations on the strategy, it was deemed appropriate to draw upon the lessons learned during the previous crises and to recognise the effectiveness of an immediate and decisive monetary intervention through the less standard instruments. This is why in the reformulation of the strategy, it is mentioned that, in recognition of the effective lower bound on policy rates, the Governing Council will employ these tools as appropriate, will continue to react with flexibility to the new challenges and will consider, if warranted, new policy instruments.
Monetary policy decisions are based on the assessment of economic and financial developments, while drawing at the same time on two interdependent types of analysis. First, the economic analysis, which focuses on the macroeconomic projections, but is enhanced with new-style data and improved macroeconomic models that include the effects of demographics, climate change, globalisation and digital transformation. Second, the monetary and financial analysis, which places emphasis on the functioning of the monetary policy transmission mechanism and assigns a specific role to financial stability.
After the review of the strategy had been completed, in the renewed press release of the decisions of the Governing Council meeting on 22 July 2021, we rephrased the ECB’s forward guidance. More specifically, in line with the new strategy, in order to support the symmetric 2% inflation target, we decided to keep key interest rates at their current or lower levels, until the following conditions are met: we see inflation reaching 2% well ahead of the end of its projection horizon and durably for the rest of the projection horizon, and we judge that realised progress in underlying inflation is sufficiently advanced to be consistent with inflation stabilising at 2% over the medium term. It was pointed out that this may also imply a transitory period in which inflation is moderately above target.
In order to succeed in achieving macroeconomic stabilisation, monetary policy must continue to be complemented with targeted and coordinated fiscal measures. The new strategy recognises the importance of conducting counter-cyclical fiscal policy that strengthens the effectiveness of monetary policy. It is worth stressing here the unprecedented joint action of the Member States of the European Union to contain the pandemic and support the economy.
Major initiatives include the use of the greatest possible fiscal flexibility under the Stability and Growth Pact, and the agreement on the Multiannual Financial Framework. At the same time, support programmes were mobilised for employees (through the instrument Support to mitigate Unemployment Risks in an Emergency – SURE), businesses (with the creation of a pan-European loan fund focusing on SMEs) and Member States (the dominant measure being the establishment of the Next Generation EU (NGEU) recovery fund). The resources of the NGEU recovery fund can be used to extend loans and subsidies to governments for growth-enhancing actions, the most important being those related to the transition to green energy, energy saving, the digitalisation of the public sector and the economy in general, as well as the shielding of the health sector.
Acknowledging the need to address the impacts of climate change, the European Union, apart from the funds of the NGEU programme, has set a goal to achieve climate neutrality by 2050. Already since 2019, the European Green Deal defines policies to achieve this goal, such as actions to limit the increase in the average global temperature and reduce greenhouse gas emissions. As an interim target, a set of proposals has been adopted to reduce emissions by at least 55% by 2030 (Fit for 55).
Faced with the challenge of climate change, central banks could not remain neutral, despite the fact that it is a matter that lies within the responsibility of governments. Climate change constitutes a major challenge for price stability through two channels. First, through physical risks, as the most common and extreme weather events affect the production process and the supply of goods, influencing price developments. Second, on account of the necessary adjustments linked with the policies for the transition to a low-carbon economy, production costs may rise and structural changes may occur affecting supply and demand and, ultimately, prices.
While reviewing our strategy, the Governing Council included an ambitious climate-related action plan. With this action plan, and without prejudice to its primary objective of price stability, the Eurosystem aims to ensure that it takes fully into consideration the impact of climate change while conducting its monetary policy.
In summary, our journey towards including climate change considerations comprises the following milestones.
First, we collect the necessary data to analyse climate change-related risks. We also adjust macroeconomic models so that they take into account the implications associated with climate change.
Second, we test our balance sheet exposure, as well as the balance sheet exposure of supervised banks, to climate risks. We have already carried out a stress test on climate change for the economy as a whole, which showed that the cost for banks and corporations to swiftly adapt to green policies is much lower than the cost of inaction and of addressing severe natural disasters in the future. At the same time, we will establish disclosure requirements for banks and securities issuers, so that these securities may be used as collateral in monetary policy operations and in private sector asset purchases. In addition, we assess whether external credit assessment institutions incorporate climate risks in the credit ratings they assign.
Third, we will consider accounting for climate risks in the evaluation criteria of eligible securities accepted as collateral in banks’ refinancing operations and in private sector asset purchases. Furthermore, we will start disclosing climate-related information regarding the corporate sector asset purchases we conduct (Corporate Sector Purchase Programme – CSPP). It should be noted that in February 2021 all members of the Eurosystem adopted a common stance for climate change-related principles of sustainable and responsible investment in our non-monetary policy portfolios.
I would also like to point out that the Bank of Greece is one of the first central banks worldwide to engage in climate change and sustainability issues, having set up as early as in 2009 the Climate Change Impacts Study Committee (CCISC). The CCISC contributes substantially to research, with the aim of identifying the risks and opportunities arising from climate change. In addition, the Bank of Greece established the Climate Change and Sustainability Centre, whose work consists in coordinating and implementing the Bank’s activities related to climate. In the context of the recent United Nations Climate Change Conference (COP 26) in Glasgow, the Bank of Greece made a commitment to contribute, within its field of competence, to achieving the goal included in Article 2.1(c) of the Paris Agreement, which provides that finance flows should become consistent with a pathway towards low greenhouse gas emissions and climate-resilient development.
As a matter of fact, a new temporary exhibition was inaugurated this week at the Museum of the Bank of Greece, entitled “Economy and Climate: Handle with care”. The exhibition aims to highlight the role of central banks in dealing with the impacts of climate change, to raise awareness among the public, especially the young generation that you represent, and to boost their active participation in the urgent mobilisation needed so that challenges are addressed.
Our goal is a modern, robust and green economy, as well as the social well-being of all citizens. Central banks and the Bank of Greece in particular contribute to this venture with all their might, within their mandates. I would like to conclude by expressing the conviction that, with the proper coordination of everyone’s efforts, we will be able to assist in an essential and sustainable growth, for a better and sustainable future.