“The basic purpose of this non-standard monetary policy measure is to step up the gear of the euro area economy by mitigating the risk of a dangerous spiral of deflation. Through buying large amounts of securities by central banks it is aimed to even more reduce long-term interest rates for households, business, and general government and to increase the incentives of financial institutions and business to invest. This will provide an impetus for the development of the European economy and the Lithuanian economy at the same time,” says Vitas Vasiliauskas, governor of the Bank of Lithuania.
The expanded asset purchase programme was announced by the Governing Council of the ECB on 22 January of this year. The ECB and the central banks of the Eurosystem every month will purchase securities in the amount of EUR 60 billion at least until the end of September 2016. This will depend on how soon the main purpose can be successfully accomplished – maintaining price stability in the medium term by reaching a sustainable inflation rate close to, but not above, 2 percent.
The scope of the purchases of each central bank participating in this programme is defined by that country’s share in the ECB’s paid up capital, in the case of the Bank of Lithuania – 0.587 percent. It will purchase debt securities with agreed maturity of 2 to 30 years. Given that the share of debt securities being purchased cannot exceed 25 percent of each issue, the amount of debt securities to be purchased by the Bank of Lithuania, taking into account the Government borrowing forecast, may amount to EUR 1.2 billion at the time of the programme.
The Bank of Lithuania will only purchase euro-denominated Government securities (GS), i.e. bonds issued in US dollars will not be purchased. Since Lithuania’s securities market is relatively small, the Bank of Lithuania will also purchase other debt securities issued by European institutions meeting the conditions of the programme.
According to Vasiliauskas, as early as before the start of the expanded asset purchase programme this programme-related expectations already had a positive effect on the euro area: the credit standards for business and households improved, the interest rates on the bonds of a number of euro area countries, including Lithuania, fell in the secondary market.
Alongside the non-standard monetary policy instruments stimulating the economy which the Eurosystem began to implement, it is crucial that the governments of European countries rapidly put though structural labour market reforms and those fostering competitiveness – which are an indispensable condition for the viability of the economy.