On July 30, BSI Economics organized a meeting to discuss developments in central bank monetary policy. The discussion brought together a chief economist from a European rating agency, a senior economist specializing in Europe for an American rating agency, a manager from an American strategy consulting firm, an academic economist based in the United States, and a chief economist from a Swiss private bank.
1) Central banks are easing their monetary policy.
The ECB has made its inflation target symmetrical, supported expectations of a 10 basis point cut in its deposit rate in September, and raised the possibility of further net asset purchases. At current levels, and without the negative rate on customer deposits having any impact, the deposit rate has no effect on household savings in the eurozone, while businesses remain sensitive to the downturn in economic and financial conditions. These two factors support the feasibility of a more accommodative monetary policy in the eurozone.
Two questions arose:
(i) the possibility for the ECB to remove the conditions on collective action clauses in order to expand its options for purchasing sovereign debt – this announcement would precede that of net asset purchases at the end of the year,
(ii) the possibility of purchasing new financial assets such as ETFs. On this last point, it was noted that the Japanese experience is not entirely conclusive. Indeed, through ETFs, the BoJ has become a major holder of shares without having a significant impact on share prices or corporate investment decisions. This is mainly because, in a world of near-zero interest rates, equity financing appears less relevant than bond financing, particularly for financially sound companies or for the most solid projects, which can obtain financing on the bond markets with a reduced risk premium. Furthermore, the impact on the discount rate (close to zero) had already been taken into account. Conversely, developments in the Japanese market also depend on changes in the yen exchange rate, which has moved in the opposite direction due to the BoJ’s announcements of easing. Ultimately, while it is difficult to assess the effects ex ante, it is certain that the final effect would depend on the size and operational conditions of any share purchase program implemented by the ECB.
2) Central banks must structurally question the relevance of supporting the energy transition. The 2015 Paris Agreement committed countries to financing this transition and making green development imperatives compatible with financial flows. In the long term, net asset purchases could involve products such as green bonds, which are still relatively illiquid at this stage but will become accessible in the medium to long term.
3) As a result, the growing politicization of central bankers is a view shared by stakeholders. Differences of opinion have emerged: (i) on the merits of a return to a mixed policy at the European level. This could, for example, take the form of collaboration between the EIB, which would issue bonds, and the ECB, which would buy them back as part of net asset purchases. (ii) on the independence of the central bank, which would remain but would be used differently by politicians to obtain favorable financial conditions for structural government spending, with a potential change in the mandate of monetary institutions.
