Recent ECB Policies Group 4 Mr. Chun Yao, Chiu Mr. Ngo Khai Hoan

Before we start… EU28 Collection of countries Eurozone Countries where euro is currency Single monetary policy

What is ECB? European Central Bank. The bank created to administer monetary policy for the countries that have converted to the euro. Comprised of The ECB and the Local Central Banks of the 28 European Union Member States.

Structure of ECB Modeled after the German Bundesbank. Governed by a six member Executive Board of Directors. Headed by a President and a Board of Governors. Capital contributions of central banks in euro area to ECB as of January 1, 2015, by country

Objectives of The ECB 3 Main Objectives: Maintain Price Stability Support General Economic Policies of the European Union States Ensure an Open Market Economy

Price stability of EU Price Stability is the main goal of The ECB’s Monetary Policy. Why? Leads to less fluctuation of the price level. Reduces Inflation Risk Premium. Helps eliminate the real economic costs affected by distorted inflation.

Its monetary policy strategy Make a quantitative definition of price stability Use a two-pillar approach to the analysis of the risks to price stability. Implement on the euro system

Quantitative definition of price stability Increase in the Harmonised Index of Consumer Prices (HICP) for the euro area of below 2%. Defined price stability as a year-on-year Maintaining inflation rates below, but close to, 2% over the medium term. In the pursuit of price stability

The monetary policy of ECB

Two-pillar approach economic analysis and monetary analysis

Implementation of the policies the Governing Council of the ECB has adopted a set of monetary policy instruments and procedures as laid down in the General documentation open market operations standing facilities minimum reserve requirements for credit institutions

So, what is wrong with EU?

Deflation and Disinflation Disinflation Deflation

Low Interest Rate

Continuous devaluation of Euro

Recently monetary policy Quantitative easing (QE) A monetary policy of central banks that entails buying bonds and other assets in order to inject liquidity to the market. Process: Buys bonds and other assets from commercial or investment banks Asset bond securities(ABS) Covered bond Public sector securities

Think about it… Why ECB choose QE policy? the conventional monetary policy tools have reached their limitations Overnight interest rates have been close zero. Central banks are impotent in using conventional monetary policy instruments QE is “extraordinary” monetary policy tool

Intention of QE Intention: lowers down the long term bond or securities interest rates Intention: reduces the investment cost Intention: stimulates the demand (investment and consumption) Intention outcome: stimulates the economy

Forward progress Start buying bond at Mar billion euro/month Total amount: 1.14 trillion euro Stimulus the economy ECB GE,NL, AT, FR PT, IT, ES, IEGR Bond market in eurozone BankFinancial market Euro devaluation Stock up Enterp rise Mort age coms umer buyingbuildingproducingIncreasing consumption Increasing employment

Is that really so good? Give back my money!!!!

The harzard of QE monetary policy The inflation rate still very low Financial assets bubble in the future German wage Spain construction Ireland housemarket Malta asset Etc…..

But…..

Conclusion Asset purchase programs have become an important tool for central banks for controlling more complex economies. Quantitative easing monetary policy hurdles the world economy from fast recovering. At the mean time, quantitative easing monetary policy may cause potential Risks.