During one of the conferences at last week’s Jackson Hole meeting, ECB council member Benoit Coeure analysed the extreme monetary measures taken by the ECB (in reality by all the main central banks) during the crisis. His opinion was that the neutral interest rate equilibrium is now very low (the product of a combination of low potential growth and low inflation expectations) which explains the remainder of the exceptional measures implemented.
No, he didn’t really specify. But indeed we can talk about asset purchases, the forward guidance of interest rates and even about negative rates in the banks’ excess reserves. In the absence of other measures, greater political protagonism in terms of structural reforms and fiscal policy, he left the door open for a continuance of the expansionary monetary measures. But recognizing the risks involved, which could be countered with prudent micro/macro measures.
In conclusion, annual M3 growth moderated in July to 4.8% from the previous 5%, while the recovery in credit to the private sector is being maintained, at a moderate pace. I am talking about total credit growth of 1.4% (1.5% previously), with credit from financial institutions increasing 1.3% (1.2%). Credit to the public sector grew 12.3% in the same period (compared with 11.7%), but credit from the financial sector to the public sector fell 2.7% from a year ago.
At the end of the day, it’s the markets. Or in other words, wholesale financing. The latter is completely true in the case of financing for the public sector, but not so much for the private sector. Earlier, I mentioned the growth in loans from the banks to the private sector, at a rate of 1.4%, split between the 2.0% rise in loans to households and the 1.3% increase in loans to companies. Meanwhile, financing via debt issuances (the big companies) is growing 4.7%. Coeure implied in his presentation that, against this backdrop of wholesale financing’s greater protagonism compared with other sources (the banks), this is something that perhaps monetary policy should take into consideration in the future. And this message coincides with a similar one from the Fed, considering that asset purchasing and forward guidance are more effective than interest rates moves.
Now dominated by the debate over when the next hike in the official interest rate should take place (September and/or December), the Fed does not have any negative interest rate reference. But the ECB does, although it admits the harm this could do to the financial system if it is maintained longer than advisable. Looking at former credit figures, perhaps this period of time could be drawing to a end sooner rather than later.