Monetary policy is designed and implemented by the European Central Bank (ECB). The current situation of clear historical exceptionality with negative interest rates, official expectations that they will remain low for as long as necessary, and liquidity expansion that is indefinite for the time being, responds to a difficult economic scenario where inflation remains far from the monetary authority’s target level. In principle, it increases the scope for monetary policy action, although it also raises uncertainties in the medium term about its effectiveness, possible distortions in market functioning, and risks to financial stability. The limits of monetary policy are recognized by the authorities, which leads them to call for a reduced future role for it compared to fiscal policy or structural reforms.
While the official interest rate is set by the central bank, the rest of the interest rate curve is set by the market itself. Agents take into account economic and inflation prospects, the greater supply and demand for financial assets, geopolitical risks, and naturally official interest rates. In Europe, the ECB’s debt purchase program also has an influence, artificially lowering debt yields. If negative official interest rates are exceptional, it is much more so that half of public debt in Europe is also trading in negative territory. The consequence of the central bank’s intervention in the markets and investors’ high risk aversion is that the reliability of the interest rate curve as a predictor of future interest rate developments is reduced. The recent past has shown us how difficult it is to anticipate interest rate developments, a difficulty that increases at a time as complicated as the present.
Bank loans are the transmission channel of monetary policy in Europe. A sector that has carried out significant balance sheet adjustments and has strengthened its soundness with capital levels that almost triple those prior to the crisis. Unlike shadow banking, wholesale markets, and other financial operators, banks are a transparent sector subject to demanding regulation and strict supervision. The confidence and security offered by banks, especially in terms of protection of their clients’ personal and financial data, contrasts with the doubts generated by new financial service operators. The authorities see banks as the containment wall against potential risks from the rest of the financial sector. And not only that, banks serve as a protective shield for retail clients against negative official interest rates. But banks need certainty with respect to exogenous factors of a regulatory nature and those derived from monetary policy. Banking stability is good for everyone.
José Luis Martínez Campuzano, Spokesperson for the Spanish Banking Association
