Exceptional times call for exceptional measures. The European Central Bank, like other central banks, has introduced non-standard measures to tackle the financial crisis and cushion its impact on the economy – what I call “enhanced credit support”. These have contained the threats to the stability of the euro area’s financial system and supported the flow of credit to companies and households over and above what could be achieved through interest rate cuts alone.

Because of their exceptional nature, these measures will have to be unwound once economic and financial conditions normalize. We at the ECB designed the non-standard measures with our exit strategy in mind, and we are ready to implement this strategy when the appropriate time comes. Stressing the importance of the exit strategy should not be confused with its activation: it is premature to declare the financial crisis over. Today is not the time to exit.
Four issues will shape our approach to exiting the non-standard measures.
First and foremost, should the non-standard measures trigger risks to price stability, we will immediately begin to unwind them and ensure the continued solid anchoring of inflation expectations. The timing and sequencing of our exit strategy depends on our real-time assessment of the economic outlook and the health of the financial system in line with our contribution to financial stability.
Second, a degree of phasing out has been built into the exit through the design of our measures. In the absence of new policy decisions, several of these measures will unwind naturally. Given that the overwhelming majority of the liquidity has been provided through repurchase agreements, a new policy decision would be necessary in order to roll these operations over once they mature.
Third, the ECB’s operational framework is well equipped to facilitate the unwinding of non-standard measures as the need arises. This framework comprises a varied and flexible set of instruments, including fine-tuning operations, allowing the absorption of surplus liquidity – promptly, if necessary. Moreover, with its interest rate corridor, the framework allows short-term interest rates to be changed while keeping some non-standard measures in place, should continued credit support be needed. The governing council can therefore choose the way in which interest rate action is combined with the unwinding of the non-standard measures.
Fourth, the outright purchases of securities by the eurozone’s central banks have been measured in both scope and volume. They have focused on the market for covered bonds and have acted only as a catalyst. We opted for a purchase program with a volume that was significant enough to improve the activity and functioning of the market, but not so large as to dominate the market or the balance sheets of eurozone central banks. The measured program facilitates its future unwinding or its offsetting by other policy operations.
With regards to future actions, we are unrestricted in our ability to take decisions, given the strong ­institutional independence of the ECB. This reflects the clear dividing line in the euro area between the responsibilities of the central bank and those of the fiscal sphere. That the ECB has not purchased government bonds is in line with this institutional framework.
The ECB has an exit strategy from its non-standard measures in place. Its implementation will build on three self-reinforcing elements: credibility, alertness and steady-handedness. These form the basis for the strong anchoring of inflation expectations in the euro area – our main asset. This strong anchoring is based on our determination and ability to act decisively whenever the need arises. The ECB’s governing council will continually assess whether policy adjustments are necessary and implement those adjustments to maintain price stability in the euro area over the medium and longer term.
Our fellow citizens can have full confidence in the determination and ability of the ECB to deliver price stability. This confidence will, in turn, contribute to a sustainable recovery.
The writer is president of the ECB.
(Source: Financial Times)