Benoît Cœuré presents evidence that suggests that the stock effect of central bank asset purchase programmes, together with increased transparency around ECB’s reaction function, has helped mitigate abrupt changes in international asset allocation in recent years.
He argues that recent changes to ECB’s forward guidance, together with sizeable future reinvestments from maturing securities under ECB’s Asset Purchase Programme (APP), will also in the future reduce the likelihood of sudden and adverse spillover and spillback effects. This will help to maintain the financial conditions necessary for ECB to achieve ECB’s price stability objective.
Mr Cœuré concludes, that it is fair to say that much clearer communication, not only by the ECB, but also by other major central banks, together with a commitment by central banks to handle changes to the size of their balance sheet with care, have contributed to substantially reducing sudden and sharp directions of change in cross-border capital flows.
This is despite the notable divergence in the pace of policy normalisation across advanced economies. As a result, policymakers have been able to pursue their domestic objectives without sending shock waves across global financial markets.
None of this is to say that markets are immune to foreign spillovers. In an integrated global financial market, central banks need to calibrate their policies according to their domestic mandates. In the euro area, this means that significant monetary policy stimulus is still needed to support the further build-up of domestic price pressures and headline inflation developments over the medium term.
This support will continue to be provided by the net asset purchases until the end of the year, by the sizeable stock of acquired assets and the associated reinvestments, and by ECB‘s enhanced forward guidance on the key ECB interest rates.
Full speech
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