1 Wolfgang Modery Directorate Monetary Policy The ECB’s monetary policy at times of crisis Visit of Representatives of the Swedish Industry Frankfurt am Main, 1 October 2009

2 Turmoil started in 2007 in US as sub-prime crisis Intensification in autumn 2008 (Lehman Brothers) Functioning of money market seriously hampered Spill-over of financial stress to real economy  severe downward impact on economic growth The unfolding of the crisis

3 World real GDP growth Source: Eurostat. Latest observations: 2009 Q1.

4 Source: Eurostat. Latest observations: 2009 Q2. Euro area real GDP growth

5 Euro area real GDP growth: historical perspective Source: Eurostat. Latest observation: 2009 Q2.

6 Euro area industrial production: historical perspective Excluding construction production Source: Eurostat. Latest observation: 2009 Q2.

7 GDP growth forecasts / projections

8 Eurosystem staff projections for euro area growth Real GDP growth between -4.4% and -3.8% in 2009 and between -0.5% and 0.9% in 2010 Upwards revision of the range for both 2009 and 2010, reflecting the recent, more positive developments and information GDP expected to continue to stabilise in second half of 2009, before gradually recovering during 2010 Projected improvement mainly supported by revival of exports and positive effects of fiscal impulse on domestic demand

9 Risks to the growth outlook Risks are broadly balanced and result from  Effects from the macroeconomic stimulus from various policy measures  Confidence improvement  Favourable developments in labour markets and foreign demand On the other hand  Stronger impact on the real economy from the turmoil in financial markets  Increases in oil and other commodity prices  Intensification of protectionist pressures  Adverse developments in the world economy from disorderly correction of global imbalances

10 Inflation Latest observation: August Sources: BIS, Eurostat and ECB calculations HICP, (percentage change compared to the previous year)

11 Source: Eurostat. Last observation: HICP August (percentage points, annual percentage changes) HICP inflation and contributions from energy and foods

12 Background slides Employment growth by sector (annual growth rates) Labour cost indicators (annual growth rates) Current labour market developments Source: Eurostat and ECB.

13 Euro area unemployment rate Percent of labour force Latest observation: July Source: Eurostat.

14 Sources: Reuters, Consensus Economics and ECB. 1 ECB’s Survey of Professional Forecasters Gathers expectations for euro area inflation, economic activity and unemployment from experts affiliated to financial or non-financial institutions based in the European Union. Latest observations: 20 August Inflation expectations (annual percentage change)

15 Survey based and market inflation expectations in the euro area Percent per annum Source: Reuters, Consensus, and ECB calculations. Latest observation: 15 September 2009.

16 HICP forecasts

17 Eurosystem staff projections for euro area inflation Price and cost expected to remain dampened in the wake of ongoing sluggish demand in the euro area and elsewhere Annual HICP inflation projected between 0.2% and 0.6% in 2009 and between 0.8% and 1.6% in 2010 Slight upward revision for both 2009 and 2010 compared with the June 2009 ECB staff projections, reflecting mainly upward revisions to energy prices

18 Risks to the inflation outlook ~Outlook for economic activity  Higher than expected commodity prices  Stronger than currently expected increases in indirect taxation and administered prices due to the need for fiscal consolidation in the coming years

19 Since the intensification of the financial crisis in autumn of 2008 … and against the background of rapidly receding inflationary pressures … … the ECB has taken a series of monetary policy and liquidity management measures … … unprecedented in nature, scope and timing Unprecedented response by the ECB to the crisis

20 ECB response: strong decline in ECB interest rates P ercentages per annum; daily data Source: ECB Last observations: 16 September 2009

21 ECB response to the crisis – enhanced credit support Primarily bank-based measures to enhance the flow of credit beyond the standard interest rate channel - Fixed-rate full allotment - Expansion of collateral - Longer-term liquidity provision - Liquidity provision in foreign currencies - Financial market support through purchases of covered bonds

22 Note: Breakdown of the sources of external financing of non-financial corporations, in percent, average 2004 – 2008 Source: ECB Monthly Bulletin, April 2009 Different role played by banks in funding firms in the euro area and the US

23 Breakdown of the financing of non- financial businesses in the US (4-quarter moving sum of transactions, in USD bn) Breakdown of the financing of non- financial corporations in the euro area (4-quarter moving sum of transactions, in EUR bn) Sources: Board of Governors of the Federal Reserve System and ECB Last observations: 2009 Q1 Different financial structures in euro area and the US

24 The Eurosystem’s balance sheet In millions, euro Source: ECB Last observations: End-of-August 2009

25 Loans to the private sector Annual percentage changes; adjusted for seasonal and calendar effects Source: ECB calculations. Latest observations: July 2009

26 MFI interest rates Annual percentage points Short-termLong-term Sources: ECB and Reuters. Latest observations: MFI interest rates: July 2009; money market rates: 9 September 2009 (average of daily data).

27 Spread between 12-Month EURIBOR/LIBOR and EONIA/OIS* ( percent p.a.) 12-Month EURIBOR/LIBOR ( percent p.a.) Sources: ECB, Bloomberg. Latest observations: 7 September * OIS: Overnight Index Swap rates Money market rates and spreads compared with those in other major currencies

28 Lessons to be drawn? (1) Make financial markets more effective by Stricter regulation of all financial market participants and products More adequate capital requirements and accounting rules Stronger international cooperation in financial oversight Appropriate time horizon for macro-economic policies Adjustment of banking models and remuneration systems Global management of global risks ?

29 Lessons to be drawn? (II) Moreover Strengthen incentives that improve disciplining forces of competition Discourage “short-termism” and strengthen concept of liability and responsibility The value added by having a monetary union was particularly proved helpful at times of financial distress