Thursday, 4 July 2019

Questions (94)

Pearse Doherty


94. Deputy Pearse Doherty asked the Minister for Finance the analysis carried out on the impact of the programme of quantitative easing of the ECB on the economy in terms of GDP, GNI* and other metrics in recent years; the forecasts that exist for its impact into the future; and if he will make a statement on the matter. [28772/19]

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Written answers (Question to Finance)

The primary objective of the European Central Bank (ECB) is to maintain price stability within the euro area by implementing monetary policy which is consistent with an inflation rate of below, but close to, 2 per cent over the medium-term. In this regard, the euro area flash headline inflation rate in June was stable at 1.2 per cent. The ECB projects that inflation will remain below target across the forecast horizon, reaching 1.6 per cent in 2021.

Quantitative easing (QE) refers to the large-scale asset purchases conducted by the European Central Bank (ECB) in order to combat persistently low inflation. The ECB’s Asset Purchase Programme (APP) and other monetary policy measures made a substantial contribution to the economic recovery in the euro area and Ireland. As a small and highly open member of the monetary union, disentangling the exact effect of the asset purchase program on Irish GDP is difficult. However, euro area estimates suggest that, on the whole, non-standard monetary policy measures including the asset purchase program, Targeted Long-Term Refinancing Operations (TLTROs) and others, will increase real GDP by approximately 1.9 percentage points cumulatively between 2016 and 2020, with the strongest impact occurring in 2016 and 2017. [1] Any increase in euro area real GDP growth in aggregate also has a strong second round impact on Ireland, by increasing foreign demand from Ireland’s trading partners.

Overall, economic evidence generally points to QE as having had positive effects on the European economy, contributing to lowering sovereign debt yields and providing a small boost to bank lending, investment, real GDP, headline inflation, and medium-term inflationary expectations. The Irish economy has benefited in particular via a reduction in sovereign borrowing costs, additional liquidity in the banking sector, and an improvement in economic activity in key export markets.

Research by the Central Bank [2] has also shown that the announcement effect of the APP caused a compression of Irish bond yields. Over the course of the APP, the average yield on Irish sovereign bonds decreased, despite increased issuance and a longer maturity profile of outstanding debt, which demonstrates that the APP had a favourable impact on the cost of servicing Irish debt. The decrease in sovereign yields passed through into lower bank funding costs and ultimately to more favourable financing conditions to households and firms.

My Department will continue to monitor monetary policy developments, including with respect to growth and inflation in the euro area, and advise accordingly. While it is not possible to predict the future path of ECB monetary policy or interest rates, guidance from the ECB suggests that monetary policy is likely to remain accommodative for some time yet. I am aware of the ECB President Mario Draghi’s recent speech (18th June) on twenty years of the ECB’s monetary policy, where he referred to the current economic outlook and downside risks facing the European economy. President Draghi noted that in the absence of a return of inflation to the ECB’s target additional stimulus will be required. Furthermore, in the coming weeks, the ECB Governing Council will consider how the instruments at their disposal can be adapted commensurate to the severity of the risk to price stability.

[1] Hammermann, Felix & Leonard, Kieran & Nardelli, Stefano & von Landesberger, Julian, 2019. "Taking stock of the Eurosystem’s asset purchase programme after the end of net asset purchases," Economic Bulletin Articles, European Central Bank, vol. 2. <>