During the last years, the European Central Bank (ECB) employed several unconventional monetary policy tools to jump-start economic growth and spur demand. Has the euro area monetary policy been effective and what have been the side effects of unconventional monetary policy, especially of the asset purchase programs? Ardo Hansson, Governor of the Eesti Pank (Bank of Estonia) and member of the ECB Governing Council, pointed out at a SAFE Policy Lecture on 11 April at the House of Finance in Frankfurt that non-standard measures of ECB monetary policy have mostly achieved their intended outcomes. However, the longer the accommodative monetary policy lasted, the higher was the probability of significant side-effects, Hansson warned.
He outlined non-standard measures tailored and applied by the ECB during several phases from 2008 onwards. According to Hansson, the decline in interest rates improved the lending conditions for EU companies as well as for EU households. “The rise in bank lending indicate that these measures have delivered results. Many of the most intended effects are becoming more and more visible”, Hansson stated.
He conceded that in some areas the outcome of the monetary policy has fallen short to expectations and even caused unintended side-effects. “There are highly-indebted EU-countries which have used the interest cost savings only to loosen fiscal policy instead of debt reduction”, he criticized. Those countries would face even more problems in the future. Also, there are some financial stability concerns, for instance, commercial property prices have moved away from their long-term average. However, overall equity prices in the euro area seemed not to be fundamentally overvalued. “The impact on structural reforms have been partly disappointing”, Hansson continued. While labor market reforms had been successfully implemented, the quality of institutions had stagnated.
According to Hansson the fact that the inflation rate in the euro area has not come close to the target rate of below, but close to 2 percent is not an indicator that the ECB has not achieved its task. Instead he asked for patience. The last years’ low inflation had primarily been caused by the decline of energy prices, Hansson said. Headline inflation had also decreased due to lower administered prices and indirect taxes. Hansson argued that “the lag between wage growth and core inflation may have become longer and the connection between wages and inflation weaker”. While it would take a bit more time, the recent improvement in the euro area growth would continue to accelerate inflation, Hansson stated. In the meantime, monetary policy should be accommodative enough to reinforce confidence in the determination to achieve its price stability goal. At the same time he warned that this period should not take too long. “Although accommodative monetary policy is necessary, the assessment of its side-effect will increase in importance.”