6 Mar 2015
At what level should ECB policy rates be given the current state of the economy? – BNPP
FXStreet (Barcelona) - Clemente De Lucia of BNP Paribas, uses Taylor rule analysis to predict that the ECB policy rates should be around 7-200bp lower at the current state of the economy, expecting the asset purchase program to aid the ECB reach the predicted rates.
Key Quotes
“Through a Taylor rule analysis we found that the refi rate, which in normal time signals the ECB monetary policy stance, should be around 70-200bp below the current level, according to which specification of the rule is adopted.”
“Traditional monetary transmission mechanism models suggest that such a cut in the policy rate would imply a reduction in long-term interest rates (weighted average) of 40-120bp.”
“How can the central bank obtain this reduction when key policy rates are at their lower bound?. QE is one option. The ECB has recently announced its plan of buying each month EUR 60bn of private and public debt securities beginning in March 2015 for as long as inflation is not be on a solid path toward price stability, and at least until September 2016. These purchases will increase the ECB balance sheet by more than 11% of GDP.”
“Using a rule of thumb, it emerges that this amount would reduce long-term interest rates in the range of 40-110bp. This is equivalent to the reduction achieved by a cut in the refi rate (in normal time, that is away from the zero lower bound) of the magnitude suggested by our Taylor rules. Yet, results have to be analyzed carefully.”
“Several caveats suggest that the effects of QE in the eurozone might be smaller than in the US, signaling that if the ECB is willing for similar results, it could have to increase the size of its program.”
Key Quotes
“Through a Taylor rule analysis we found that the refi rate, which in normal time signals the ECB monetary policy stance, should be around 70-200bp below the current level, according to which specification of the rule is adopted.”
“Traditional monetary transmission mechanism models suggest that such a cut in the policy rate would imply a reduction in long-term interest rates (weighted average) of 40-120bp.”
“How can the central bank obtain this reduction when key policy rates are at their lower bound?. QE is one option. The ECB has recently announced its plan of buying each month EUR 60bn of private and public debt securities beginning in March 2015 for as long as inflation is not be on a solid path toward price stability, and at least until September 2016. These purchases will increase the ECB balance sheet by more than 11% of GDP.”
“Using a rule of thumb, it emerges that this amount would reduce long-term interest rates in the range of 40-110bp. This is equivalent to the reduction achieved by a cut in the refi rate (in normal time, that is away from the zero lower bound) of the magnitude suggested by our Taylor rules. Yet, results have to be analyzed carefully.”
“Several caveats suggest that the effects of QE in the eurozone might be smaller than in the US, signaling that if the ECB is willing for similar results, it could have to increase the size of its program.”