Governor’s statement following the ECB’s monetary policy meeting
The previously known risks to economic growth in Slovenia and the entire euro area have been joined this year by the escalating uncertainty surrounding coronavirus. The Bank of Slovenia’s assessment is that the impact will be largest in manufacturing and in services, most notably transport and tourism. The psychological factor of the uncertainty is being reflected in a decline in the general economic sentiment, and in short term changes in household spending habits, which is already reducing economic projections. To support favourable financing conditions during this time of heightened uncertainty, the members of the Governing Council of the ECB decided on a package of temporary additional measures at yesterday’s meeting. Here it should be reiterated that given the nature of the crisis, it is the fiscal policy response above all that is key.
Although certain indicators in the first months of the year were suggesting macroeconomic stabilisation after a slightly worse final quarter of last year, the outbreak of coronavirus in China had a rapid impact on the euro area economy, particularly through disruptions to supply chains and a fall in foreign demand.
The increased risks in connection with coronavirus have brought considerable volatility and uncertainty to the financial markets in recent weeks, which has been reflected in a plunge in global stock markets and an increase in credit risk on a range of financial instruments. There has also been a sharp fall in oil prices. The situation is partly being mitigated by the record low yields on US treasury bonds and German government bonds, and other risk-free interest rates that serve as a benchmark for other market instruments.
In this situation we are emphasising that, alongside monetary policy, a response is required mainly from other macroeconomic policies to mitigate the impact on the economy from the spread of coronavirus. Although current monetary policy is already highly accommodative, the Governing Council decided on a package of temporary additional measures at yesterday’s meeting, with the aim of safeguarding liquidity and credit conditions, and maintaining favourable financing conditions in times of heightened uncertainty:
1. Change in terms of targeted long-term refinancing operations (TLTRO-III)
To support bank lending and ensure the smooth transmission of monetary policy, a decision was made to modify the terms of the TLTRO-III: the borrowing allowance was increased, the lending performance threshold was cut, the interest rate on borrowings was lowered, and certain other technical terms were modified. The possibilities of relaxing the eligibility criteria will also be examined.
2. Additional LTROs to bridge liquidity needs until settlement of TLTRO-III operation in June
The Eurosystem will conduct additional LTROs between March and June 2020. They will not be conditioned by bank lending, and will be conducted as fixed rate tender procedures with full allotment. The tenders are to provide banks with liquidity support until the settlement of the TLTRO-III in June. The rate in these operations will be fixed at the average of the deposit facility rate over the life of the respective operation. The first operation will be announced next week.
3. Temporary envelope of additional asset purchases under the APP
Asset purchases under the APP will be temporarily increased by an additional EUR 120 billion until the end of the year, with an emphasis on the private-sector purchase programmes. The additional purchases will support favourable financing conditions for the real economy in times of heightened uncertainty.
Additional measures at euro area level
In parallel with the monetary policy measures, measures were also taken as part of the Single Supervisory Mechanism that allow banks to fully use their capital and liquidity buffers and to more effectively face the operational challenges posed by the pandemic.
Measures at the Bank of Slovenia
In the wake of the rapid rise in the number of cases in Slovenia, the Bank of Slovenia has decided to increase the level of protection for its staff and the key systems that it provides for the economy, the public and other market participants. Having successfully tested the functioning of key processes under various stress scenarios in recent weeks, we decided to order the majority of our staff to work from home from the beginning of next week. We should emphasise that this is a precautionary measure to ensure that all of our activities and processes continue to function smoothly.