Transcript Phase 1

JEM027
Monetary Economics
Monetary policy implementation during
the crisis
Tomáš Holub
[email protected]
November 2, 2015
Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague
Basic questions
▪ How has the crisis changed MP implementation?
▪ What tools are available close to the ZLB?
▪ What were the differences among major central
banks in terms of the UMP tools?
▪ Why has the CNB chosen exchange rate as its
UMP instrument?
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Reasons for UMP tools
1
Disruptions to the MP transmission mechanism
2
Reaching the zero-lower-bound (ZLB) on
nominal interest rates
Two phases of the crisis: phase 1 was essentially
about the reason 1 , phase 2 more about the
reason 2
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Disruptions to transmission
CB‘s interest rate (e.g. a rate hike)
▪ MP transmission
Rise of market interest rate (ST and LT)
Exchange rate
appreciation
Lower
import
prices
Decrease in
exports,
increase in
imports
Higher instalments
and non-performing
loans ratios
Decrease in asset
prices
Stricter credit
conditions
Decrease in wealth
▪ Problems in the FS
Savings
Reduction in
growth,
firm
consumption
investments
reduction
ConsumpReduction in
tion reducfirm
tion, savings
investments
growth
Decrease production
Employment reduction, wage growth decrease
Inflation decrease
Exchange rate channel
goes via the
financial system,
especially in its early
stages
Interest rate and credit
channel
thus lead to
malfunctioning of
transmission and/or
autonomous
tightening of the MP
conditions
Asset price channel
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Reaching the ZLB
▪ With very depressed demand
r
conditions, the equilibrium real
IR may be strongly negative
IS

▪ With nominal IR at the ZLB,
real interest rates are given by
inflation expectations
▪ If this is not sufficient easing,
0
r* (π*)

economy falls deeper into
recession (); inflation
expectations fall, real IR goes
up, etc.
▪ Solutions: reduce LT IR,
Y*
Y
increase πe to ease further ()
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PHASE 1
MP implementation during the crisis
Phase 1: trying to keep market rates close to main policy rates,
satisfy increased demand for liquidity (i.e. doing the standard
job in non-standard circumstances) by:
▪ Broadening the range of counterparties and collateral
▪ Full-allotment fixed-rate tenders (ECB)
▪ Narrower corridors around the main policy rate
▪ Extending maturities of monetary operations
▪ FX swaps with other central banks, etc.
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PHASE 1
ECB in August 2007
ECB interest rates and the
overnight interest rate
Percentages per annum
Source: ECB and Reuters
“
August 14, 2007 – JeanClaude Trichet, President of
the ECB
As I indicated after the
Governing Council meeting on
2 August, the ECB has paid
great attention to the
developments in the market.
We have provided in
particular the liquidity
which was needed to permit
an orderly functioning of the
money market…
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PHASE 1
Fed in August 2007
Release date: August 10, 2007
“
The Federal Reserve is providing liquidity to facilitate the
orderly functioning of financial markets.
The Federal Reserve will provide reserves as necessary
through open market operations to promote trading in
the federal funds market at rates close to the FOMC's
target rate of 5-1/4 percent. In current circumstances,
depository institutions may experience unusual funding
needs because of dislocations in money and credit
markets. As always, the discount window is available as
a source of funding.
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PHASE 1
ECB in October 2008
ECB interest rates and the
overnight interest rate
Percentages per annum
▪ Tendency of money market
rates to move above the main
policy rate during the crisis
▪ Effort of the ECB to avoid this
▪ Crisis intensified after the fall
of Lehman Brothers
Source: ECB and Reuters
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PHASE 1
ECB in October 2008
“
October 8, 2008 – The Governing Council of the ECB decided on
the following two measures
As from the operation settled on 15 October, the weekly main
refinancing operations will be carried out through a fixed rate tender
procedure with full allotment at the interest rate on the main
refinancing operation, i.e. currently 3.75%.
As of 9 October, the ECB will reduce the corridor of standing facilities
from 200 basis points to 100 basis points around the interest rate on
the main refinancing operation…
The ECB will continue to steer liquidity towards balanced conditions in
a way which is consistent with the objective to keep short term rates
close to the interest rate on the main refinancing operation.
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PHASE 1
Money market risk premia
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PHASE 1
MP implementation during the crisis
Overview of selected central banks primarily influencing the interbank market
and smoothens of financing in foreign currencies
Conditions of credit transactions between central bank and
financial institutions
Bank
Extending of the eligible
counterparties
Broadening of
eligible collateral
Extension of
the maturity
FX
swaps
Fed
BoE
1
ECB
SNB
1 Related to EIB only
Source: Central banks
+ Full allotment (i.e. supplying
unlimited amount at the given IR)
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PHASE 2
MP implementation during the crisis
Phase 2: adding unconventional measures (i.e. leaving the
standard concept), typically close to the ZLB:
▪ Purchase of government bonds (quantitative easing – QE;
US, UK, ECB only recently)
▪ Purchase of covered bonds or other private assets
▪ “Forward guidance”, i.e. commitment to keep low IRs for
some period (Sweden, US, BoE, ECB)
▪ FX interventions (Israel, Chile) / exchange rate commitment
(Switzerland, Czech Republic)
▪ Negative nominal rates (Switzerland, Sweden, Denmark,
ECB)
For more detail see: http://www.bankofengland.co.uk/education/inflation/qe/video.htm
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PHASE 2
CBs‘ key policy rates
Key policy rates
▪
▪
The policy rates of major central banks were cut close to the zero lower bound
(ZLB) during the crisis
The ECB was an exception for quite some time, but this difference was partly
notional, and does not apply any more (ECB‘s deposit rate is now even negative)
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PHASE 2
Money market rates
Money market rates
▪
In practice, money market rates fell to low levels in 2009 not just in the US, but
also in the EA, where the market rates declined well below the main policy rate in
the periods of surplus liquidity.
▪
Currently, EA rates are slightly negative (the deposit rate is -0.20 % p.a.).
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PHASE 2
Literature on the ZLB
▪ Krugman, P.R. (1998): “It's Baaack: Japan's Slump and the Return
of the Liquidity Trap.”
▪ Eggertsson, G.B., Woodford, M. (2003): “The Zero Bound on
Interest Rates and Optimal Monetary Policy.”
▪ Bernanke, B.S., Reinhart, V.R. (2004): “Conducting Monetary
Policy at Very Low Short-Term Interest Rates.”
▪ Jung, T. a kol. (2005): “Optimal Monetary Policy at the ZeroInterest-Rate Bound.”
▪ Fujiwara, I. (2006): “Evaluating monetary policy when nominal
interest rates are almost zero.”
▪ Svensson, L.E.O. (2006): “Monetary Policy and Japan’s Liquidity
Trap.”
▪ Cúrdia, V., Woodford, M. (2011): “The central-bank balance sheet
as an instrument of monetary policy.“
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PHASE 2
MP implementation during the crisis
Overview of selected central banks primarily influencing long-term interest rates
and the exchange rate
Outright purchases of financial assets
Government
bonds
Bank
Covered bonds
Other private
assets
Foreign currency
Fed
BoE
ECB
SNB
Enforced in 2010 by the Greek crisis (SMP: ≈ EUR
220 bn.; OMT not activated; APP since Jan 2015)
Source: Central banks
ABSPP launched in Oct
2014
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CBs‘ balance sheet expansion
CB total asset size
Percent of GDP
▪
▪
Large B-S expansion for all major central banks
ECB more hesitant in the early phase + endogenous exit feature, as the banks
were allowed to repay LTRO early – proved to a problem in the double dip, now
being reversed by the extended APP (QE)
Source: DataStream, IFS
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Fed‘s operations
Selected assets of the Federal Reserve
USD millions
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Eurosystem‘s operations
ECB’s liquidity operations
Eurosystem main liquidity-providing
measures
EUR billions
% of the simplified balance sheet size
Source: ECB
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ECB vs. Fed
▪ Difference not so much in the size of balance sheet
expansion, but more in the timing and structure
▪ ECB more reliant on LT bank financing, quite reluctant to buy
GBs massively (until recently) vs. Fed mainly buying
government bonds
Reasons
▪ Differences in mandate (lexicographic vs. dual)
▪ Differences in historical experience (Weimar hyperinflation vs.
Great Depression)
▪ Prohibition of monetary financing for the ECB
▪ Differences in the financial system (bank-based vs. marketbased)
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Efficacy of the UMP tools (1/2)
Total cumulative effects of bond
purchases on 10-year government bonds
Cumulative change (bps)
Note: Some estimates for the range are derived visually from graphs; some papers study changes in bond prices over a two-day window following
announcements; staff estimates consider a one-day window
Source: Literature (see Appendix table 2, IMF 2013a), Bloomberg,, and IMF staff calculations
http://www.imf.org/external/np/pp/eng/2013/090313.pdf
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Efficacy of the UMP tools (2/2)
Summary of empirical studies on the macro effects of UMP
1/ To make results comparable, estimated impacts have been translated into the equivalent of a 100 bps shock to the spread
Source: http://www.imf.org/external/np/pp/eng/2013/090313.pdf
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“Forward guidance”
▪ May be understood differently by different CB‘s
– Announcing the future path of interest rates consistent with
the CB‘s standard reaction function (business as usual for
some central banks, but not, e.g. for the ECB)
– Commitment to keep the interest rate at the ZLB for
a longer time period than the CB‘s standard reaction
function would suggest, with the aim of bringing down
the LT nominal rates and increasing inflation expectations,
thus reducing LT real rates (truly unconventional)
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Fed‘s forward guidance (1/3)
Release date: January 25, 2012
“
… the Committee expects to maintain a highly
accommodative stance for monetary policy. In particular,
the Committee decided today to keep the target range for
the federal funds rate at 0 to 1/4 percent and currently
anticipates that economic conditions--including low
rates of resource utilization and a subdued outlook for
inflation over the medium run--are likely to warrant
exceptionally low levels for the federal funds rate at
least through late 2014.
▪ i.e. Fed has also started to provide guidance on future
interest rate outlook
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Fed‘s forward guidance (2/3; „the dots“)
Appropriate pace of policy firming
Percent
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Fed‘s forward guidance (3/3)
Release date: December 12, 2012
“
In today’s statement, the Committee also recast its forward
guidance to clarify how it expects its target for the federal funds
rate to depend on future economic developments. Specifically,
the Committee anticipates that exceptionally low levels for
the federal funds rate are likely to be warranted “at least as
long as the unemployment rate remains above 6½ percent,
inflation over the period between one and two years ahead
is projected to be no more than half a percentage point
above the Committee’s 2 percent longer-run goal, and
longer-term inflation expectations continue to be well
anchored.”
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ECB‘s forward guidance
Release date: July 2013
“
… Looking ahead, our monetary policy stance will remain
accommodative for as long as necessary. The Governing
Council expects the key ECB interest rates to remain
at present or lower levels for an extended period of
time. This expectation is based on the overall subdued
outlook for inflation extending into the medium term, given
the broad-based weakness in the real economy and
subdued monetary dynamics.
▪ i.e. ECB started to use forward guidance more recently, in
vaguer form, and stressing that they clarify the standard
reaction function and do not deviate from it
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BoE‘s forward guidance
Release date: July 2013
“
… The MPC intends not to raise Bank Rate from its current level of 0.5% at
least until the Labour Force Survey headline measure of the
unemployment rate has fallen to a threshold of 7%, subject to the
conditions below… The guidance linking Bank Rate and asset sales to the
unemployment threshold would cease to hold if any of the following three
‘knockouts’ were breached
▪
In the MPC’s view, it is more likely than not, that CPI inflation 18 to 24
months ahead will be 0.5 percentage points or more above the 2% target
▪
Medium-term inflation expectations no longer remain sufficiently well
anchored
▪
The FPC judges that the stance of monetary policy poses a significant threat
to financial stability…
▪ … but more then they moved to a broad range of indicators
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CNB‘s forward guidance
Release date: September 2013
“
At the close of the meeting the Board decided unanimously to leave
the two-week repo rate unchanged at 0.05%.
Interest rates will remain at current levels (i.e. at technical zero)
over a longer horizon until inflation pressures increase
significantly.
The CNB is ready to use the exchange rate if further monetary policy
easing becomes necessary. The probability of launching foreign
exchange interventions has not changed and remains high.
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Literature on the exchange rate tool at the ZLB
▪ McCallum, B.T. (2000): “Theoretical Analysis Regarding a Zero
Lower Bound on Nominal Interest Rates.”
▪ Svensson, L.E.O. (2001): “The Zero Bound in an Open Economy:
A Foolproof Way of Escaping from a Liquidity Trap.”
▪ Coenen, G., Wieland, V. (2003): “The zero-interest-rate bound and
the role of the exchange rate for monetary policy in Japan.”
▪ Jeanne, O., Svensson, L.E.O. (2007): “Credible Commitment to
Optimal Escape from a Liquidity Trap: The Role of the Balance
Sheet of an Independent Central Bank.”
▪ Iwata, S., Wu, S. (2012). “A Note on Foreign Exchange
Interventions at Zero Interest Rate.”
▪ Beneš, J., a kol. (2013): “Exchange Rate Commitment versus
Exchange Rate Interventions at the Zero Level of Interest Rates.“
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Svensson (2001): ”Foolproof way“
▪ ”Announce an upward-sloping price-level target path.
▪ Announce that the currency will be devalued and that the
exchange rate will be pegged to a crawling exchange-rate
target.
▪ Announce that, when the price-level target path has been reached,
the peg will be abandoned, either in favor of flexible price-level
targeting…or in favor of flexible inflation-targeting.
▪ Then, just do it.
▪ This will jump-start the economy and escape deflation by a real
depreciation of the domestic currency, a lower long real
interest rate, and increased inflation expectations.“
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FX interventions – Switzerland (1/2)
Release date: March 12, 2009
“
The Swiss National Bank (SNB) announced that it would take forceful
action to ease monetary conditions. It decided to make another interest
rate cut and act to prevent any further appreciation of the CHF against
the euro. To this end, the SNB will increase liquidity substantially by
engaging in additional repo operations, buying CHF bonds issued by
private sector borrowers and purchasing foreign currency on the FX
markets.
▪ August 2011: the SNB narrowed the key interest rate range from 0.00–
0.75 p.p. to 0.00–0.25 p.p. and sharply increased the supply of liquidity
”
▪ September 2011: the SNB set a minimum exchange rate of 1.20
CHF/EUR, stating that it would buy foreign currency in unlimited quantities
if the rate fell below this level
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FX interventions – Switzerland (2/2)
CHF/EUR exchange rate
SNB’s foreign currency investments
CHF billions
▪
The SBN‘s floor on the CHF/EUR exchange rate was viewed as relatively
successful, even though the FX reserves had to increase significantly in some
periods; but then the SNB shocked the market with a sudden exit in January 2015.
Source: http://www.cnb.cz/miranda2/export/sites/www.cnb.cz/en/monetary_policy/monitoring/download/1104_cbm.pdf
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CNB‘s November 2013 decision
▪ The Board decided to start using the exchange rate as an additional
instrument for easing the monetary conditions, stating that: ”The
CNB will intervene on the FX market to weaken the koruna so that the
exchange rate is close to CZK 27/EUR.“
▪ The exchange rate level was chosen to avoid deflation or long-term
undershooting of the inflation target and to speed up the return to the
situation in which the CNB will be able to use its standard instrument,
i.e. interest rates.
▪ The exchange rate commitment is one-sided. This means that the
CNB will prevent excessive appreciation of the koruna exchange rate
below CZK 27/EUR. On the weaker side of the CZK 27/EUR level, the
CNB is allowing the exchange rate to move according to supply and
demand on the FX market.
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Literature on the Czech case
▪ Franta, M., Holub, T., Král, P., Kubicová, I., Šmídková, K., Vašíček, B.
(2014): “The Exchange Rate as an Instrument at Zero Interest Rates: The
Case of the Czech Republic.“ Czech National Bank, Research and Policy
Note no. 3/2014, September,
http://www.cnb.cz/en/research/research_publications/irpn/2014/rpn_03_2014.html.
▪ Malovaná, S. (2014): “The Effectiveness of Unconventional Monetary
Policy Tools at the Zero Lower Bound: A DSGE Approach.” Master thesis,
IES FSV UK.
▪ Alichi, A., J. Benes, J. Felman, I. Feng, C. Freedman, D. Laxton, E.
Tanner, D. Vavra, and F. Zhang (2014): “Frontiers of Monetary
Policymaking: Adding the Exchange Rate as a Tool to Combat
Deflationary Risks in the Czech Republic.” IMF Working Paper,
September (forthcoming).
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Reasons for the decision to act
▪ The November 2013 forecast identified a need for significant further
monetary policy easing.
▪ The disinflation process was seen as driven primarily by insufficient
demand, not by favourable supply-side shocks.
▪ Therefore, the view prevailed that the CNB could not apply an ’escape
clause‛, thus temporarily ignoring the deviation from target.
▪ Declining inflation expectations were shifting the real interest rates in
the opposite direction than needed.
▪ The passive monetary policy scenario showed a high probability
of inflation turning negative in early 2014.
▪ The risk assessment pointed to high potential costs of a policy error for
the passive approach, and to a higher probability of such an outcome
than implied by the core analyses.
▪ Therefore, the need for action became quite obvious.
See: http://www.cnb.cz/en/monetary_policy/weakening_koruna/index.html
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Passive MP scenarios – November 2013
4
He adline inflation (y/y in %)
27
CZK/EUR
3
26
2
1
25
0
-1
I/12
III
1,4
I/13
III
I/14
III
I/15
III
24
I/12
III
I/13
5
3M PRIBOR (in %)
1,2
0,6
2
0,4
1
0,2
0
0,0
III
I/15
III
III
I/15
III
Baseline scenario
Passive MP
Passive MP +ER shock
3
0,8
I/14
GDP (y/y in %)
4
1,0
III
-1
-0,2
-2
-0,4
-0,6
-3
I/12
III
I/13
III
I/14
III
I/15
III
I/12
III
I/13
III
I/14
▪
Passive monetary policy would be associated with negative inflation, nominal
exchange rate appreciation and weak economic recovery.
▪
The CNB perceived a risk of the short-term negative inflation turning into
protracted deflation.
Source: http://www.cnb.cz/en/research/research_publications/irpn/2014/rpn_03_2014.html
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The choice of instrument
▪ First round of contingency planning took place already in 2009.
▪ The debate intensified and became more specific in 2012.
▪ Discussed the full menu of options available in the literature.
▪ The choice reflected the specific Czech conditions:
– Negative rates: besides general doubts, there are legal constraints in CZ
– Forward guidance: CNB has been publishing interest rate path since 2008; the
guidance was strengthened in November 2012: ”The rates will remain at zero level over
a longer horizon until inflation pressures increase significantly.“
–
–
–
–
QE: banking sector saturated with liquidity, already low LT gov‘t bond yields
Qualitative easing: shallow private bond markets, no market disruptions
Price level targeting: IT regime has served us well
FX interventions / exchange rate: clearly the most effective tool in a small open
economy with no FX balance sheet mismatches
See: http://www.cnb.cz/en/monetary_policy/weakening_koruna/index.html
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Exchange rate pass-though at the ZLB
Interest Rate
CZK/EUR
Real Consumption Growth (YoY)
1
1.2
0.6
ZLB=1q
0.4
ZLB=1q
1
ZLB=2q
ZLB=3q
0.8
ZLB=4q
0.6
0.2
ZLB=2q
ZLB=3q
0.5
ZLB=4q
0
0.4
0.2
0
-0.5
0
I/11
I/12
I/13
I/14
I/15
I/11
I/12
CPI Inflation (YoY)
I/13
I/14
I/15
I/11
I/12
Real GDP Growth (YoY)
I/13
I/14
I/15
Real Export Growth (YoY)
1
1
0.5
1
0.5
0
0
0.5
-0.5
-0.5
-1
0
I/11
-1.5
I/12
I/13
I/14
I/15
I/11
I/12
I/13
I/14
I/15
I/11
I/12
I/13
I/14
I/15
▪
Exchange rate pass-trough is likely to be higher than in normal times due to:
(i) a more durable nature of the currency move; (ii) ZLB, which implies no
offsetting reaction from the interest rates.
▪
The longer is the ZLB binding (and the more expected this is), the higher the
ERPT and the more positive impact on GDP and consumption.
Source: http://www.cnb.cz/en/research/research_publications/irpn/2014/rpn_03_2014.html
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All CNB‘s ZLB scenarios compared
4
He adline inflation (y/y in %)
4
3
3
2
2
1
1
0
0
-1
-1
I/12
III
1,4
I/13
III
I/14
III
I/15
III
I/12
5
3M PRIBOR (in %)
1,2
3
0,8
2
0,6
III
I/13
III
I/14
III
I/15
III
I/15
III
GDP (y/y in %)
Baseline scenario
Passive MP
Passive MP +ER shock
Alternative scenario
4
1,0
1
0,4
0,2
0
0,0
-1
-0,2
-2
-0,4
-3
-0,6
I/12
▪
M P-re levant inflation (y/y in %)
III
I/13
III
I/14
III
I/15
III
I/12
III
I/13
III
I/14
III
The relevant policy comparison was between the alternative scenario with
exchange rate instrument and the passive MP scenario(s) – here the difference
was clearly favourable for all major variables (plus recall the uncertainty as
regards the return to the target with passive MP).
Source: http://www.cnb.cz/en/research/research_publications/irpn/2014/rpn_03_2014.html
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The exchange rate since the decision
CZK/EUR rate, CNB commitment and FX interventions
29
8
7
28
6
5
27
4
3
26
2
1
25
1/13
4/13
7/13
10/13
1/14
FX interventions (rhs, EUR bil.)
4/14
7/14
10/14
CZK/EUR (lhs)
1/15
4/15
7/15
0
10/15
Exchange rate commitment (lhs)
▪
After the CNB‘s policy announcement, koruna reached 27 CZK/EUR quickly, and
has been moving at somewhat weaker levels since then.
▪
Actual interventions were quite massive in November 2013, but took place only for
a few days after the policy decision of the CNB.
▪
Another round of interventions started in July 2015.
Source: http://www.cnb.cz/en/research/research_publications/irpn/2014/rpn_03_2014.html
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Macroeconomic developments so far
Dostupné
k 7.11.2013
II/13
-1.3
9/13
1.0
9/13
0.2
9/13
7.1
Gross domestic product (s.a.)
Consumer price index
Monetary-policy relevant inflation
General unemployment rate (in %, s.a.)
Average nominal wage in business sector
(in CZK, s.a.)
II/13 25,199
Average nominal wage
II/13
1.2
Number of vacancies
9/13 39,040
Composite confidence indicator (index)
10/13
88.9
Dostupné
k 21.10.2015
II/15
4.6
9/15
0.4
9/15
0.3
8/15
5.1
II/15
26,188
II/15
3.4
9/15 102,772
9/15
95.9
▪
▪
All key macroeconomic indicators look better now compared to November 2013.
▪
This mainly reflects strong imported anti-inflationary pressures (see the next slide).
The only exception is inflation, which is farther below the CNB‘s target now than
in 2013 (MP-relevant inflation is almost the same as in September 2013.
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Domestic CPI vs. foreign PPI outlook
Czech CPI inflation and CNB‘s forecasts
(in %, y/y)
▪
PPI in the effective EA and CF outlook
(in %, y/y)
The defletionary pressures from the euro area producer prices are much stronger
and more protracted than assumed in November 2013.
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Conclusions
1
The room for IR cuts has been exhausted during the crisis
2
In the Phase 1, CBs mainly adjusted their refinancing
operation in an effort to keep market rates close to policy rates
3
Truly unconventional measures started to be used in Phase 2
– effort to bring down LT interest rates, increase inflation
expectations, weaken the exchange rate, etc.
4
In the end, the Fed and ECB did similar things during the crisis
in terms of market IRs and BS-expansion, even though using
different tools (and the ECB more reluctantly)
5
Communication has gained on importance as a policy tool
6
The exchange rate is a very effective UMP tool for small open
economies, as illustrated by the Czech case.
7
Exit issues – beyond our scope, but very important
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