27 September 2023

ECB President Lagarde: Hearing of the Committee on Economic and Monetary Affairs of the European Parliament

The amount of excess liquidity has decreased by more than one trillion euros over the past twelve months, for two main reasons. First, the repayments of the third series of targeted longer-term refinancing operations (TLTRO III)...second, the reduction of the securities under the APP.

Excess liquidity

Let me now briefly turn to excess liquidity, which you have chosen as a topic for today’s hearing.^[1]

The shift to a full allotment system during the financial crisis and the adoption of new monetary policy instruments have resulted in a strong rise in commercial banks’ holdings of central bank money.

The surplus of funds over minimum reserves is referred to as excess liquidity. The funds are held as overnight deposits with the Eurosystem, remunerated at the deposit facility rate, and exceed the level of minimum reserves^[2], which are now remunerated at 0%.^[3]

The amount of excess liquidity has decreased by more than one trillion euros over the past twelve months, for two main reasons. First, the repayments of the third series of targeted longer-term refinancing operations (TLTRO III). And second, the reduction of the securities held under the asset purchase programme (APP), with reinvestments being fully discontinued as of July this year.^[4]

Additional TLTRO repayments and the gradual rundown of the APP portfolio will also cause our balance sheet to shrink over the coming years, further reducing excess liquidity.

At the same time, Eurosystem staff is analysing the optimal long-run size and composition of our balance sheet – and by implication, the adequate level of excess liquidity. This is not a trivial issue as it has implications for the way we implement monetary policy. It is also an issue that is relevant for all major central banks, as the environment in which we operate has undergone fundamental changes over the past decade.

To this end, we are conducting a comprehensive review of the operational framework for steering short-term interest rates, assessing the costs and benefits of alternative regimes. We aim to conclude this review by spring 2024 and we will of course report to this Committee on the outcome.

Conclusion

Allow me to conclude.

The last few years have been particularly turbulent, with unprecedented shocks hitting Europe. Decisive progress in your parliamentary term has shown that Europe can stick together, respond to challenges and emerge stronger.

But important legislative work remains to be done before next year’s elections. Making progress on banking union, capital markets union and the digital euro rests in your hands. Your involvement is also crucial for the second topic chosen for today’s hearing: ensuring the right mix of fiscal and monetary policies in the euro area.

Before the pandemic, fiscal policy was often procyclical. But the response to the pandemic was different. National fiscal policies responded countercyclically to the downturn, working in tandem with monetary policy and supervisory measures.

As the energy crisis fades, governments should continue to roll back the related support measures to avoid driving up medium-term inflationary pressures. At the same time, fiscal policies should be designed to make the euro area economy more productive and to gradually bring down high public debt.

A robust economic governance framework is overwhelmingly in our common interest. Agreement on the reform of the EU’s fiscal framework should therefore be reached by the end of the year.

We have outlined four priorities in our ECB opinion, which I would summarise in four key guideposts:^[5] lower sovereign debt and lower heterogeneity of debt levels across countries. Higher growth and higher countercyclicality of fiscal policy.

Now is the time to move forward on this dossier, and I count on this Committee to play its part in ensuring a timely adoption.

 

ECB

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