Macroeconomic policy

• The In Gold We Trust report 2021 focuses on these topics:
  Status quo of gold: price development over the last 12 months, important influencing factors, and trends in the gold market.
• Profound changes in fiscal and monetary policy will have tangible consequences for the monetary system and ultimately for the population.
• A longer-term inflationary period that we expect as a consequence of monetary climate change could additionally provide a massive boost to the price of silver.
• Nevertheless, the importance of cryptocurrencies and digital assets will increase, not least due to the monetary climate change.

Speech by Isabel Schnabel, Member of the Executive Board of the ECB, at NYU Stern Fireside Chat

• The pandemic has posed enormous challenges to monetary policy, which have varied over time.
• By offering to purchase large amounts of securities, central banks succeeded in restoring orderly trading conditions.
• In doing so, we prevented the public health crisis from turning into a full-blown financial crisis, a risk that was particularly acute in the euro area.
• This was reinforced, in a strong act of European solidarity, by the agreement on the EU Recovery and Resilience Facility.
• The question facing the ECBs Governing Council at its meeting on 10December 2020 was how to best provide this support.
• One was that the unprecedented fiscal and monetary policy support had succeeded in delivering highly favourable financing conditions.
• The nominal euro area GDP-weighted yield curve stood at its lowest ever recorded level (left chart, slide 2).
• The Governing Council responded to these conditions with a powerful commitment to preserve favourable financing conditions.

What distinguishes a policy of preserving favourable financing conditions?

• The first is a departure from a policy that attempts to push interest rates even lower.
• The benefits from reducing interest rates further from very low levels may still outweigh the costs in certain circumstances.
• But when uncertainty is large and private demand constrained, monetary policy is like pushing on a string.
• In such circumstances, monetary policy can best support the economy by ensuring that favourable financing conditions prevail for as long as needed.
• The second characteristic is the way we deliver on our commitment to preserve favourable financing conditions.
• We buy more when financing conditions are becoming less favourable, and we buy less when they are stable or improving.
• Today, they are a means to an end: they are used to the extent necessary to deliver on our commitment to preserve favourable financing conditions.

Preserving favourable financing conditions: a reaction function

• And what is the reaction function?
• The other principle is that the favourability of financing conditions is a relative concept.
• Conversely, an increase in real interest rates is not necessarily a sign that financing conditions are becoming less favourable.
• These considerations are what distinguishes a policy of preserving favourable financing conditions from yield curve control.
• The latter targets a fixed level of nominal yields with a view to increasing, rather than preserving, the degree of monetary accommodation.
• These types of movement, if sizeable and persistent, make financing conditions less favourable as they are not accompanied by a corresponding increase in real equilibrium rates.
• A firm commitment to favourable financing conditions therefore requires a certain minimum purchase volume to offset this effect on real interest rates.
• Preserving favourable financing conditions therefore puts the drivers of changes in financing conditions, and their speed of adjustment, into the focus of our assessment.
• In addition, changes in market-based financing conditions have to be assessed jointly with the likely future trajectory of the economy, in particular the inflation outlook.

Assessing recent market developments

• Between the December decision and our most recent Governing Council monetary policy meeting on 11March, we saw a rapid increase in global and euro area nominal interest rates.
• The factors that have caused a rise in risk-free interest rates have been largely benign in the euro area.
• These movements should not be seen as reflecting a genuine reappraisal of the expected future path of inflation.
• Term structure models suggest that much of the recent rise in nominal ten-year OIS rates reflects an increase in term premia which, in turn, likely reflects a rise in the inflation risk premium (right chart, slide 9).
• In other words, markets have started to revise the balance of risks around the medium-term inflation outlook.
• It is also unclear how firms will adjust their profit margins to make up for lost income and higher leverage.
• Real rates up to a maturity of five years have even continued to reach new historical lows in recent weeks (left chart, slide 11).
• Against this backdrop, the Governing Council announced that we would significantly step up purchases under the PEPP in the second quarter, in line with market conditions.

Conclusion

• Preserving favourable financing conditions is a powerful policy response to the challenges we are currently facing.
• It is a strong commitment to protect an exceptional degree of policy accommodation for as long as needed.
• It signals our unwavering determination to offset the impact of the pandemic on the projected inflation path.
• This promise is underpinned by a purchase envelope that is unprecedented in the history of the ECB.

• NEW YORK, March 22, 2021 /PRNewswire/ -- (S&P Global Ratings) -- The global economic recovery is gaining steam--powered by accommodative fiscal and monetary policy stances and accelerating vaccinations.
• These fears are most pronounced in the U.S. but could spread as the recovery gains traction.
• We think inflation fears are overblown and that orderly reflation, around a return to sustainable growth, is a healthy development for both macro and credit development, said S&P Global Ratings today in its article "Orderly Global Reflation Will Support The Recovery From COVID-19."
• Ratings information can also be found on S&P Global Ratings' public website byusing the Ratings search box located in the left column at www.standardandpoors.com .

Speech by Fabio Panetta, Member of the Executive Board of the ECB, at an online event organised by Bocconi University

• In 2020, with the pandemic raging, the direction of policy support was obvious and the choices facing policymakers were relatively narrow.
• Monetary and fiscal authorities everywhere intervened to support the economy on a massive scale.
• But in 2021, with the progress made on vaccine technology, policy choices have become less clear-cut.
• As such, it might be tempting to conclude that there is less need for monetary policy support.
• We will still face two prominent gaps that we need to close: the output gap and the inflation gap.
• At present, the risks of providing too little policy support still far outweigh the risks of providing too much.

Eliminating downside risks

• There is a good chance that a recovery will take hold in the latter part of this year.
• But that is not a justification for policies to run on neutral.
• First, in a dramatic crisis like this one, macroeconomic policymakers should not bank on the most favourable scenario materialising.
• As I have argued elsewhere, the pandemic has produced an asymmetric balance of risks, which requires an asymmetric reaction function.
• Just as we looked though temporary negative inflation in recent months, we will look through this transitory hump in inflation.
• And this shallow growth path remains vulnerable to a series of downside risks.
• This divergence will bring risks of its own: in fact, we are already seeing undesirable contagion from rising US yields into the euro area yield curve.
• The risks to private consumption growth are therefore substantial.

Chart 1 Household financial situation and savings

(change in percentage balance from January 2020 to January 2021)
• Given the weak financial starting point of many firms, investment is likely to only increase gradually and cautiously.
• [5] A risk management approach would therefore clearly call for policy to eliminate these risks and reinforce the central growth path.
• And, if we were to do too much and push the economy onto a stronger growth path, that would in fact be a welcome result.

Closing the gaps faster

• But the experience of the last cycle suggests that it is hard to lift inflation dynamics without demand testing potential more dynamically.
• Despite several years of robust economic growth, the euro area economy might still have been operating with significant economic slack even on the eve of the pandemic.

Chart 2 Pre-crisis and recent estimates of the output gap in the euro area

(% of potential output) Source: ECB staff calculations.
• In the decade after the Lehman crash, yearly domestic demand growth in the euro area was almost 2 percentage points lower on average than it had been in the previous decade, and it was much lower than that of our main trading partners (Chart 3).
• This contributed to compressing inflation persistently below our aim, leading to a significant price level gap (Chart 4).
• [6] That was not the case in the United States or the United Kingdom, where domestic demand stayed on a stronger trajectory.

Chart 4 Harmonised Index of Consumer Prices (HICP)

(all-items, January 1999=100)
• This clearly called for action, as reflected in the additional support we decided on in December.
• Boosting demand is also necessary to reduce hysteresis risks after the pandemic.
• [8] Policy should not accept hysteresis as a reality which imposes new supply constraints, but rather explicitly set out to test those constraints.
• [9] A tight job market also improves the outlook for future demand, thereby strengthening business investment.

Delivering the necessary policy stance

• So the challenge we face is how to deliver the necessary policy stance.
• Since the start of the pandemic, monetary policy in the euro area has gone through three phases.
• In the first phase the phase of fragmentation the flexibility of our pandemic emergency purchase programme (PEPP)[10] averted an unjustified widening of spreads which would have disrupted monetary policy transmission.
• In the second phase, the PEPP increasingly became a tool for steering the overall monetary policy stance.
• This essentially means more focus on anchoring key financial variables above all, lending rates and the yield curve as key indicators of the monetary policy stance.
• So, that constellation of financing conditions should be seen as the reference point for our policy moving forward.

Chart 5 Euro area real and nominal rates

• In this way, we can prevent a tightening of financing conditions which would otherwise lead to inflation remaining below our aim for longer.
• Eventually, firm commitment to steering the euro area yield curve may allow us to slow the pace of our purchases.
• But in order to reach that point, we must establish the credibility of our strategy by demonstrating that unwarranted tightening will not be tolerated.

From policy fatalism to policy coordination

• But counterfactual analysis shows that after the financial crisis and during the COVID-19 shock the ECBs expansionary policies have been highly effective.
• Without our policies, inflation and GDP growth would have been dramatically lower and many more people would have lost their jobs.
• Preserving favourable financing conditions will have a powerful effect on demand and inflation.
• However, given the fall of the natural rate of interest,[14] monetary policy is more effective if deployed in sync with other policies.
• Monetary, fiscal and structural policies must reinforce each other in order to cut slack and close the gap between saving and investment.
• Fiscal policies continue to be a key channel for transmitting monetary policy to the real economy[15] and they are expected to remain supportive in 2021.

Chart 6 Euro area real and potential GDP

(EUR billions)
• They need to target investment in technology, education and infrastructure, creating an environment that bolsters growth and supports the sustainability of debt.
• We have a joint interest in making the European economy more dynamic.
• [16] NGEU is an important tool precisely because it ensures that common spending triggers growth-enhancing reforms that subsequently benefit all.

Conclusion

• My main message today can be summed up with the title of a song by the electronic music duo Daft Punk[18]: Harder, better, faster, stronger.
• The harder we push to close the output and inflation gaps, the better the outlook for the euro area economy.
• Achieving this will require the right combination of monetary and fiscal support at the EU level, and it will require continued, determined reforms at the national level.