FRANKFURT – Konrad Adenauer, Germany’s first chancellor after World War II, famously said: “Why should I care about the things I said yesterday?” What he meant was that events can sometimes unfold at a speed that outpaces our ability to understand them. So, as 2014 winds down, it is worth asking ourselves, with the benefit of hindsight: Have we at the European Central Bank reacted swiftly enough to maintain price stability in the face of threats, as our mandate requires? I think the answer is yes.
We noticed that our monetary policy was no longer having the effect on private borrowing costs to which we were accustomed. It was obvious that the lending channels in the banking system had become dysfunctional; excessively restrictive borrowing conditions were suppressing demand. In response, the ECB did precisely what any central bank would have done: we acted to restore the relationship between our monetary policy and the cost of borrowing, aiming to bring down the average rate that households and firms have to pay.
In June, we introduced a series of targeted longer-term refinancing operations (known as TLTROs) to provide funding for banks at very low fixed rates for a period of up to four years. The TLTROs were designed to maximize the chances that banks would pass on the funding relief to borrowers. Our programs to purchase asset-backed securities and covered bonds were tailored to help lubricate further the transmission of lower funding costs from banks to customers.
Together, these measures offer a powerful response that addresses the root causes of impaired bank lending, thereby facilitating new credit flows to the real economy. And tentative evidence suggests that they are delivering some initial tangible benefits to the euro area’s economy.