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Monetary policy in a low interest rate environment Congress of Actuaries

Berlin, 6th June 2018

Peter Praet Member of the Executive Board of the European Central Bank

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© 2018-06-06 – Congress of Actuaries, Berlin 2

Source: ECB. Latest observation: May 2018.

Long-term government bond yields (10-year yields; percentages per annum)

-3

0

3

6

9

12

15

18

1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 2018

Germany

United States

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Long term interest rate: components

Expected real rate Real term premium

Expected inflation Inflation risk premium

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Source: Consensus Economics. Latest observation: Q2 2018.

5 years ahead growth expectations for the euro area (percentages per annum)

1.2

1.4

1.6

1.8

2.0

2.2

2.4

2003 2005 2007 2009 2011 2013 2015 2017

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© 2018-06-06 – Congress of Actuaries, Berlin

Real GDP & pre-crisis expected path index, 2006 = 100

Source: Consensus and ECB calculations. Note: Expected growth path as in Consensus October 2007. Latest observation: 2018.

Source: ECB. Notes: Adjusted loans (i.e. adjusted for sales, securitisation and cash pooling activities). Latest observation: April 2018.

Bank loans to private sector (annual percentage changes)

-10

-5

0

5

10

15

20

25

30

2003 2005 2007 2009 2011 2013 2015 2017

DE ES EA

90

100

110

120

130

140

2006 2008 2010 2012 2014 2016 2018

DE

EAES

Actual growth

Expected growth path in late 2007

DE ES EA

5

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Source: ECB. Notes: Ratings based on Moody’s, Fitch, Standard & Poor’s and DBRS. Last observation: 31 May 2018.

Share of euro area sovereign bonds with AAA-rating

(percent)

Share of short-term government debt with AAA-rating relative to GDP

(percent)

Source: ECB calculations. Notes: Ratings based on Moody’s, Fitch, Standard & Poor’s and DBRS. AAA-rating based on at least one of its ratings being AAA. Short-term debt refers to securities with a residual maturity of up to and including 2 years. Last observation: 30 April 2018 for government debt, end 2016 for GDP.

0

20

40

60

80

100

0

20

40

60

80

100

2007 2009 2011 2013 2015 2017

At least one AAA-rating At least two AAA-ratings

0

10

20

30

40

50

0

10

20

30

40

50

EA US

AAA short-term debt to GDP

6

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1.0

1.5

2.0

2.5

3.0

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

7

Source: Thomson Reuters. Latest observation: 4 June 2018.

Long-term inflation expectations (percentages per annum)

Source: Consensus Economics and SPF. Latest observation: Q2 2018.

Euro area 5-year forward inflation-linked swap rate 5 years ahead

(percentages per annum)

1.5

2.0

2.5

3.0

3.5

1991 1994 1997 2000 2003 2006 2009 2012 2015 2018

Consensus inflation expectations - 6-10 years aheadSPF inflation expectations - 5 years ahead

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Source: ECB Survey of Professional Forecasters.

Option-implied probability density function of euro area inflation over the next two years

Sources: Bloomberg, Reuters, ECB calculations. Notes: This chart shows the risk-neutral probability distribution function implied by two-year zero-coupon inflation options. These risk-neutral probabilities may differ significantly from physical, or true, probabilities. They are estimated on the basis of call (“caplets”) and put options (“floorlets”) with different strike rates on the (three-month lagged) euro area HICPxT (ex tobacco) index, assuming Black-Scholes option pricing and implied volatilities that vary across strike rates (“volatility smile”).

Survey-implied probability density function of euro area inflation in two years time

0

0.2

0.4

0.6

0.8

-4% -3% -2% -1% 0% 1% 2% 3% 4%

Latest SPF (2018Q2)2017Q32015Q1

0.0

0.2

0.4

0.6

0.8

-4% -3% -2% -1% 0% 1% 2% 3% 4%

Latest observation (1 Jun 2018)2017Q3 (29 Sep 2017)2015Q1 (31 Mar 2015)

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Price of inflation and deflation protection (basis points per annum)

Source: Bloomberg. Note: The price of inflation (deflation) protection refers to the price of a year-on-year inflation option with a 4% cap (0% floor) for a horizon of five years. Latest observation: 1 June 2018.

0

50

100

150

200

250

300

350

400

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Price of inflation protection Price of deflation protection

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• our policy rates, • our asset purchase programme, • and our forward guidance on each of these tools

Monetary policy stance determined by combination & interaction of:

• the TLTROs, which will remain outstanding for the next three years

… complemented by:

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The ECB’s forward guidance

11

• expected to remain at present levels for an extended period of time • and well past horizon of net asset purchases

Key ECB interest rates

• net asset purchases intended to continue at monthly pace of €30 billion, until end-Sep 2018

• or beyond, if necessary & in any case until GovC sees sustained adjustment in path of inflation (SAPI) consistent with inflation aim

• Eurosystem will reinvest principal payments from maturing securities for an extended period of time after end of net purchases, and in any case for as long as necessary

Asset Purchase Programme (APP)

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• Headline inflation on course to reach levels below, but close to 2% in the medium term;

Convergence

• Sufficient confidence in durable stabilisation of inflation around these levels;

Confidence

• Resilience of inflation convergence even after the end of net asset purchases.

Resilience

Criteria for sustained adjustment in the path of inflation (SAPI)

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-0.4

-0.2

0.0

0.2

0.4

Jan.17 Jul.17 Jan.18 Jul.18 Jan.19 Jul.19 Jan.20 Jul.20 Jan.21

Apr GovC forward (25 Apr 18) Latest forward (4 Jun 18)

Expected APP horizon

13

EONIA forward curve estimated from OIS (percentages per annum)

Sources: Thomson Reuters and ECB calculations. Latest observation: 4 June 2018 for realised EONIA, April 2018 for Bloomberg survey.

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