Excerpt from the speech by Peter Praet, Member of the Executive Board of the ECB at the FT Debt Capital Markets Outlook Conference in London, on 12 February 2015.
Faced with an increasing risk of a too prolonged period of low inflation, ECB intensified stimulus to a degree necessary to bring inflation closer to 2%.
ECB decided to launch an expanded asset purchase programme in January this year, due to the “gap” between inflation projections and their policy objective.
Inflation gap is the difference between
- ECB aim of an inflation rate below but close to 2% over the medium-term and
- ECB projection for inflation over that same horizon, based on current monetary policy stance and the information on the state and evolution of the economy.
If the inflation gap widens, and the monetary policy stance remains unchanged, it follows that there is a “missing stimulus” to which ECB may need to respond.
The transmission of asset purchases to the real economy
- banks may sell their securities to the central bank, and thus have an excess reserve position
- more favourable market funding conditions will translate into lower lending rates for borrowers in the real economy
- returns on securities will be compressed – maintaining net interest income will require banks to shift their portfolios away from securities and towards loans to firms and households
- as credit conditions further ease, and the macroeconomic outlook improves, banks will expect lower delinquencies thanks to improving macroeconomic conditions. They should require lower credit risk premia from firms and households, implying lower lending rates.
ECB will continue to monitor the progress towards a sustained adjustment in the path of inflation and act accordingly.
Please find the full speech at ECB webpage http://www.ecb.europa.eu/press/key/date/2015/html/sp150212.en.html
