Lecture by Krista Kalnbērziņa, Principal economist, Latvijas Banka "Eurosystem monetary policy response to the pandemic"

1. Eurosystem monetary policy response to
the pandemic
Krista Kalnberzina
Principal economist
Bank of Latvia

2. Eurosystem

4. Economic and monetary union - who uses the euro?
€
340
million people in
member states
175
million people in
countries and
territories where
currency linked
to the euro
60
states or
territories linked
its currency to the
euro
19
member
states

5. Euro is the second currency used for payment transactions in
the world
Source: ECB
Global payments by currency, %

6. Eurosystem tasks
6
Main tasks Other tasks
defining and implementing monetary policy banking supervision
conducting foreign exchange operations
banknotes
holding and managing the euro area’s foreign
currency reserves
statistics
promoting the smooth operation of payment systems macroprudential policy and financial stability
international and European cooperation

7. ECB objective – price stability
MAIN AIM – PRICE STABILITY
ECB Governing Council
Monetary policy decisions based on risk
assessment
Economic data
and shocks
Monetary and
financial data
All available information
ECONOMIC
ANALYSIS
MONETARY
ANALYSIS
Checking the
story
https://www.youtube.com/watch?v=SNDzxB6gSxI&ab_ch
annel=DeutscheBundesbank

8. Euro area economy

9. Euro area is one of the world`s largest economies
Source: Eurostat, IMF
Population, millions
GDP per capita, thds euro

10. Euro area GDP by country, 2020 (%)
Close to 30% of euro area GDP is created in Germany
GDP structure, 2018 (%)
Source: Eurostat

11. 0
5
10
15
20
25
30
35
40
45
50
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
Euro area UK US China Japan
Source: World Bank, Eurostat
Preču un pakalpojumu eksports, % no IKP
Global developments impact euro area via significant share of
export in the GDP
Eiro zonas eksporta tirgi, % no kopējā eksporta

12. External environement

13. Source: Our World in Data
Covid-19 new cases (7 day moving average)
per 100 000 inhabitants
Covid waves since the beginning of 2020
Covid-19 new cases in the EA (7 day moving
average) per 100 000 inhabitants
0
20
40
60
80
100
120
140
160
USA
Brazil
India
Russia
UK
0
20
40
60
80
100
120
140
160
Austria Belgium
France Italy
Ireland Netherlands
Spain Germany

14. World economic activity collapsed at the start of the pandemic
-8
-6
-4
-2
0
2
4
6
8
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
World
Euro area
Source: IMF
World real GDP, % Composit PMI, %
10
20
30
40
50
60
70
2017
2017
2018
2018
2018
2019
2019
2019
2020
2020
2020
2021
Euro area
World

15. ESCB CONFIDENTIAL
*Merchandise World Trade last observation January, FBX last observation 05.04
Source: CPB World Trade Monitor, LB calculations; freightos.com
Merchandise world trade
15
Merchandise world trade volumes return to pre-pandemic level
60
70
80
90
100
110
120
130
-11.0
-9.0
-7.0
-5.0
-3.0
-1.0
1.0
3.0
5.0
7.0
9.0
Jan-16
Apr-16
Jul-16
Oct-16
Jan-17
Apr-17
Jul-17
Oct-17
Jan-18
Apr-18
Jul-18
Oct-18
Jan-19
Apr-19
Jul-19
Oct-19
Jan-20
Apr-20
Jul-20
Oct-20
Jan-21
per 3m %change

16. Comodity price volatility impact euro area inflation
Global commodity prices (food (index), oil (USD/barel))
Source: Bloomberg
0
20
40
60
80
100
120
140
0
200
400
600
800
1000
1200
1400
1600
1800
2000
Food Oil rhs

17. -100
-80
-60
-40
-20
0
20
40
60
80
100
120
Retail and recreation
Grocery and pharmacy
Transit and stations
Workplaces
Vaccination 3rd
lockdown
Source: Our World in Data, Google (27.02.2021); Oxford university (27.02.2021)
New Covid-19 hospitalisations for Covid-19
by age
17
Israel has fully vaccinated 80% of their population at the age 60+ and it
has an effect on Covid-19 cases and hospital occupancy
Google mobility index in Israel (7 day rolling
average)

18. Euro area developments

19. Average Stringency and Google mobility index in EA (% of a typical week)
19
Euro area economy has been hit by the pandemic
-100
-80
-60
-40
-20
0
20
Stringency index
Workplaces mobility
Groceries and pharmacies mobility
Stations mobility
Retail and recreation mobility

20. -8.0
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Source: Eurostat
GDP real growth, %
20
Steep contraction in demand colapses the GDP
-8.0
-7.0
-6.0
-5.0
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
2018 2019 2020
External balance
Inventories
Investment
Private
consumption
Government
consumption
GDP real growth, by component pp

21. Source: Eurostat
Unemployment and labour slack in euro area, thousands of persons
21
Due to COVID 19 the people are left without work
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

22. Euro area inflation remains below the ECB target
Inflation, year on year %
Source: Eurostat
Inflation by component, %
1.3
0.9
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
Headline inflation Core inflation
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
(jan-mar)
Food
Non-energy
industrial goods
Energy
Services

23. Source: Bloomberg, Our World in Data
EU Vaccine Supplies (mil. doses; cumulative)
23
Euro area lagging behind in vaccinations, however expected to
accelerate
Vaccine doses administered per 100 people
0
200
400
600
800
1000
1200
1400
1600
1800
2000
Q4
2020
Q1
2021
Q2 Q3 Q4 Q1
2022
Q2
AstraZeneca Pfizer/BioNTech J&J
Moderna Curevac Sanofi/GSK
0
20
40
60
80
100
120
140
14.12.2020 14.01.2021 14.02.2021 14.03.2021 14.04.2021
Israel Austria Belgium
Canada China France
Germany Ireland Italy
Spain United Kingdom United States

24. Monetary Policy
24
Price stability is the
best contribution
that monetary
policy can make to
economic growth

25. HICP inflation in the largest euro area countries (%, yoy)
ECB definition of price stability
Source: Rostagno et Al. (2018). A Tale of Two Decades: the ECB’s Monetary Policy at 20, Eurostat 25
► in the pursuit of price stability, ECB aims to
maintain inflation rates below,
but close to, 2% over the
medium term
► Inflation is measured by year-on-year
increase in the Harmonised Index of
Consumer Prices (HICP)

26. Why inflation rates should be maintained below, but close to,
2%?
26
Source: ECB
Correction mechanism
take into account the
possibility of HICP inflation
slightly overstating true
inflation as a result of a small
but positive bias in the
measurement
Safety margin
provide an adequate margin
to reduce the risks of deflation
Differences across the
countries
provide a sufficient margin to
address the implications of
differences in inflation across
the euro area countries

27. Transmission mechanism of monetary policy
Economic
activity
Inflation
Inflation
expectations
Interest
rates
Exchange
rate

28. → Stabilize the price level
→ Enchance transmission mechanism
→ Lower interest rates in interbank market
→ Stimulate lending developments
ECB key policy rates are at historic lows
ECB key interest rates (%)
Source: ECB 28
-1 %
0 %
1 %
2 %
3 %
4 %
5 %
6 %
Deposit facility rate Marginal lending facility Main refinancing operations

29. 29
Key interest
rates
Monetary policy instruments
Standard measures Non-standard measures
Deposit/
lending facility
Reserve
requirements
Asset
purchase
programs
Additional
liquidity
support
Forward
guidance

30. How do asset purchase programs work?
30
Eurosystem purchases
safe financial assets
from financial
institutions…
1. 3.
2.
4.
5.
…allowing companies
and households to
borrow more…
… reducing interest
rates…
…supporting the
investments and
increasing
consumption…
…stimulating
economy and inflation
Sources: ECB, BBC

31. Avots: Bloomberg
Key policy rates in major central banks (%)
31
On June 6, 2014, ECB became the first major central bank to
introduce negative policy rates
-1
0
1
2
3
4
5
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
ECB MRO Federal Reserve System Bank of England Bank of Japan ECB DFR

32. ECB’s monetary policy has been very expansionary
32
The
Governing
Council
expects the
key ECB
interest rates
to remain at
present or
lower levels
for an
extended
period of time.
TLTRO I
ABSPP – asset
backed securities
purchase program,
CBPP – covered
bond purchase
program
Expanded
APP:60
bn/m,
announce
public
sectror bond
buying
APP:
announce
reinvesting
TLTRO II
CSPP:
Corporate
sector
purchase
program
APP: 80 bn/m
expects the key
ECB interest
rates to remain
at present or
lower levels for
an extended
period of time,
and well past
the horizon of
our net asset
purchases
APP: 60
bn/m
APP: 30
bn/m
APP: 15 bn/m APP: end of net
purchases
APP: Restart
20 bn/m
TLTRO III
Expect interest
rates to remain
at their present
levels for an
extended period
of time, and well
past the horizon
of our net asset
purchases
.. expect
interest rates to
remain at their
present levels
at least
through the
summer of
2019 and in any
case for as long
as necessary
…interest rates
at their present
levels at least
through the
end of 2019,
and in any case
for as long as
necessary…
…interest rates
to remain at
their present or
lower levels…
Jul-2013 Jun-2014 Sept-2014 Jan-2015 Dec-2015 Mar-2016 Dec-2016 Jun-2017 Oct-2017 Jun-2018 Dec-2018 Mar-2019 Sep-2019
MRO: 0.15%
MLF:0.4%
DFR: -0.1%
MRO: 0.05%
MLF: 0.3%
DFR: -0.2%
MRO: 0.05%
MLF: 0.3%
DFR: -0.3%
MRO: 0.0%
MLF: 0.25%
DFR: -0.4%
MRO: 0.0%
MLF: 0.25%
DFR: -0.5%
2-tier system
Source: ECB

33. ECB’s measures to support the euro area economy in a
response to the coronavirus pandemic
Source: ECB 33

34. ECB reacted promptly to support markets during the
coronavirus pandemic
34
Source: ECB
Apr-2020
TLTRO III
easing of the
conditions
PELTRO
pandemic
emergency
longer term
refinancing
operations
Mar-2020
PEPP
pandemic
emergency
purchase
program 750
mn
Additional
APP: 120 mn
Jun -2020
PEPP:
+600 mn
TLTRO III
easing of the
conditions
Dec -2020
PEPP: +500 mn.,
Extend till Q2 2022
TLTRO III extension
of low-interest rate
period
Mar -2021
PEPP: purchase
pace increase
MRO: 0.0%
MLF: 0.25%
DFR: -0.5%

35. Source: ECB
Eurosystem balance sheet, tn EUR
35
Since the start of asset purchases, Eurosystem’s balance
sheet has grown more than three times
0
1
2
3
4
5
6
7
8
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Other assets
MRO
LTRO
PSPP
ABSPP
CBPP
CSPP
PEPP
Excess liquidity

36. Impact on markets from the ECB’s expansionary monetary
policy
36

37. ► Banks have to pay for the extra
liquidity that is kept in contral
bank (that exceed the minimum
reserve requirement multiplied
with Tier-2 multiplier)
► Interbank reates decrease, even
turn negative => bank
essentially is lending more than
receiving back
Money market rates have followed the ECB’s key policy rates
– also in negative territory
Sources: ECB, Bloomberg, EMMI 37
-1
0
1
2
3
4
5
6
EONIA €STR 3M EURIBOR 12M EURIBOR ECB DFR ECB MRO
Money market rates and ECB’s key policy rates (%)

38. Source: Bloomberg
10Y sovereign bond yields, %
38
Asset purchase programs support the favourable borrowing
conditions for the euro area members’ governments
-5
0
5
10
15
20
25
30
35
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Spain Italy Portugal Greece France Germany USA
-1
-0.5
0
0.5
1
1.5
2
2.5
3
Jan-20 Apr-20 Jul-20 Oct-20 Jan-21 Apr-21

39. Source: ECB Statistical Data Warehouse (SDW)
*IRF period of up to one year (new business)
Monetary financial instututions (MFI) lending rate on
new loans to Non-financial corporations (NFCs)* (%)
39
The interest rates on loans have dropped considerably since
the ECB started the asset purchase programs
Monetary financial instututions (MFI) lending rate on new
loans to households (HHs) for house purchase* (%)
0 %
1 %
2 %
3 %
4 %
5 %
6 %
7 %
8 %
I
2004
VII
I
2005
VII
I
2006
VII
I
2007
VII
I
2008
VII
I
2009
VII
I
2010
VII
I
2011
VII
I
2012
VII
I
2013
VII
I
2014
VII
I
2015
VII
I
2016
VII
I
2017
VII
I
2018
VII
I
2019
VII
I
2020
VII
I
2021
Euro area, range of interest rates
Euro area, interest rate
Latvia, 3-m moving average interest rate
0 %
1 %
2 %
3 %
4 %
5 %
6 %
7 %
8 %
I
2004
VII
I
2005
VII
I
2006
VII
I
2007
VII
I
2008
VII
I
2009
VII
I
2010
VII
I
2011
VII
I
2012
VII
I
2013
VII
I
2014
VII
I
2015
VII
I
2016
VII
I
2017
VII
I
2018
VII
I
2019
VII
I
2020
VII
I
2021
Euro area, range of interest rates
Euro area, interest rate
Latvia, 3-m moving average interest rate

40. Source: ECB Statistical Data Warehouse (SDW)
MFI lending to NFCs and HHs (yoy, %, contributions in ppts,
s.a.)
40
Since the introduction on non-standard monetary policy
measures, lending in euro area has improved
MFI lending to NFCs and HHs by county (%,
contributions in ppts)
-5 %
0 %
5 %
10 %
15 %
2005
I
VII
2006
I
VII
2007
I
VII
2008
I
VII
2009
I
VII
2010
I
VII
2011
I
VII
2012
I
VII
2013
I
VII
2014
I
VII
2015
I
VII
2016
I
VII
2017
I
VII
2018
I
VII
2019
I
VII
2020
I
VII
2021
I
NFCs (contribution) HHs (contribution) NFCs (growth)
HHs (growth) Total growth
-3 %
-2 %
-1 %
0 %
1 %
2 %
3 %
4 %
5 %
6 %
7 %
8 %
BE
SK
FR
MT
AT
DE
EE
SI
FI
LU
LT
PT
IR
IT
CY
ES
LV
NT
GR
EA
NFCs (contribution) HHs (contribution) Total growth

41. 50
100
150
200
250
300
350
400
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
MSCI World Eurostoxx 50 S&P 500
Source: Bloomberg
World, euro area and USA stock indices (Index: 2004=100)
41
The uncertainty related to coronavirus pandemic caused turmoil in the
stock market with stock prices dropping considerably, however, now the
prices have recovered to at least pre-crisis levels

42. lb100.lv
naudasskola.lv
makroekonomika.lv
bank.lv
Presentation will be available on
www.makroekonomika.lv
Thank you!