The ECB reduced its monetary policy in exceptional


The president of the ECB, Mario Draghi, has announced a reduction of its program to purchase outstanding public debt.
© DANIEL ROLAND / AFP/ DANIEL ROLAND

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This time, there it is. The european central Bank (ECB) announced the schedule of withdrawal of its monetary policy exceptional redemption of the public debt launched there are more than two and a half years, in march 2015. At the time, it was to ward off the risk of deflation, the downward spiral of prices that is activated when the companies postpone their investments and households consumption, which will eventually weigh on salaries, demand, and production.

Without surprise, the board of governors, chaired by the Italian Mario Draghi, has decided to reduce its purchases of assets, mainly public debt (but also companies), from 60 to 30 billion euros per month from 1 January 2018.

It’s been months that the institution based in Frankfurt was preparing the minds to reflux, so as not to rush the financial markets and trigger a financial storm. Last year, it already had reduced the amount of its interventions from 80 to 60 billion euros intended to lower the interest rate demanded by investors to hold public debt, reduce the interest rate passed on to them by private banks to companies and households and, consequently, to bring down the euro.

“Dove”

It must be said that the economic landscape has changed considerably. The growth of the euro area accelerates clearly. It is expected to reach 2.2 % of GDP this year compared to 1.7 % in 2016, and 1.4% in 2015, according to Insee. In this context, the ECB would seize the opportunity to begin to ease its monetary policy outstanding, which generates perverse effects. By lowering the rate of interest on the public debt, the central banks encourage the deferral of investors in riskier assets, with the hope of a better performance. This can generate financial bubbles. But the ECB has another reason for wanting to reduce his doses of morphine : to wean a patient in better health allows you to restore the efficiency of the pain in case of relapse.

But the ECB has remained very conservative. The program, which was to last until the end of this year, will be extended at least until the end of September 2018 and until inflation recovers. In all cases, it will not pass abruptly from 30 billion to zero, according to Mario Draghi. A posture of “dove” (as opposed to the falcons, in the first rank of which the representative of the Bundesbank), supported by a large majority in the Board of governors, has ensured the Italian president at his press conference. The ECB announcement even be prepared to increase its purchases and to extend them in time, in the event of a worsening economic outlook. It will also maintain the size of its balance sheet by reinvesting the money from the debt that she holds when she arrives at maturity. It will do so for an “extended period of time after the end of the program” and ” as long as necessary “.

Avoid the crash bond

The risk of the rate of interest on the public debt go up in arrow explains this caution. When the demand for public debt securities decreases sharply, the price at which they will resell on the financial markets fall. And causes what is called a ” crash bond “. Private banks and insurers, who hold a lot, are seeing the value of their portfolios collapse, which can be a problem when they need to sell these bonds to the public. The States, meanwhile, are forced to offer interest rates much higher to continue to be able to issue new debt, which strike the public finances.

The ECB could not ignore the persistent risk of inflation that is too low, far from its objective of a level close to 2 %. A rise in price that is too soft would indeed run the risk of a renewed threat of deflation, especially in a context of rise of the euro. A spiral that would prevent households, businesses and States in debt to relieve their burden. For the ECB, the recovery in prices and economic activity still depend on too much of its policy to be able to stop more quickly.

Interest rates are zero or negative for a long time

The gradual reduction of the programme of purchases of public debt does not sign the end of a very accommodating monetary policy. The rate of short-term interest fixed by the central bank will continue them, ” at their current levels for an extended period, and well beyond the horizon limit for the net purchase of assets “, provides for the ECB. They remain stuck at zero, and the rate at which commercial banks deposit their liquidity in the day-to-day to the ECB turns out to be even negative (- 0,4 %).

“The ECB’s decision is fully in line with our anticipation for a long time that the euro area will maintain a highly accommodative monetary policy at least until the end of the term of office of Mr. Draghi” by 2020, was immediately noted Jean-Michel Six, the chief economist of the rating agency, Standard and Poor s.

Emmanuel Macron may therefore momentarily blow. The interest rates of France should still remain very low next year. Remains to be seen whether this will always be the case then, in 2019 and beyond.

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