Negative Euro Area Interest Rates and Spillovers on Western Balkan Central Bank Policies and Instruments

Welcome Addresses

International Monetary Fund
Published Date:
May 2017
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I would like to thank Governor Sejko for his kind words, and more importantly, for hosting what promises to be a very interesting conference in Tirana.

I also would like to thank Ambassador Graf and the Swiss Government, especially its State Secretariat for Economic Affairs (SECO), for the financial assistance they provide in support of many IMF capacity-building projects, like in Albania.

It is an honor for me to represent the MCM Department of the IMF in this gathering. As most of you know, one of the main activities of the MCM Department is assisting with capacity building in IMF member countries in the areas of monetary policy and financial stability.

Capacity building in these areas is a very rewarding activity. It is rewarding because it challenges us, IMF staff, to find innovative ways to transfer general principles or recent advances in the areas of monetary policy and financial stability to the specific realities of our member countries.

This transfer is never a one-way process, from Fund staff to the country officials. It is always a two-way process. And both parties benefit from it. I can tell you from my own experience that we, Fund staff, learn a lot from capacity building. And we also are able to see that countries benefit from it as well.

Albania’s successful adoption of an inflation-targeting framework is an excellent example of this two-way cross fertilization process. The country has clearly benefitted from having a more transparent and effective monetary policy framework, and a low and stable rate of inflation. And Fund staff have learned from this successful implementation, too.

Conferences like this are another important dimension of capacity building. Learning about experiences of similar and not so similar countries is a very useful and important knowledge-sharing activity. And learning about how a group of countries responds to a common external shock, which is the main theme of this conference, is particularly important.

In fact, one of the most important lessons I have learned in my 25 years at the Fund is that global financial conditions matter a lot. Global shocks elicit policy responses from the large world economies. And those policy responses create spillovers in other economies. All the presentations and discussions that we will have in this conference have to do with spillovers. Because we are in the Western Balkans, the spillovers of most relevance are those related to the monetary policy and financial conditions in the euro area. If we were somewhere else in the world, we would probably be discussing spillovers from the US monetary policy, or from China’s.

That is just the way it is. In small open economies, policy making is affected by and has to be responsive to changes in global financial conditions. This has to happen probably to a larger extent than what simple textbook models would suggest. And it is precisely because reality is more complex than textbook models that these conferences are so important. There is a lot to learn from discussions and exchanges of views among central bankers, policymakers who share the same objectives and face the same external shocks.

The policy toolkits may be a bit different, the domestic circumstances would probably be even more different, but the external shock they are confronting is the same, and the challenges that arise from the spillovers from that shock are also very similar.

For the Western Balkans, the external shock that created the spillovers that will be discussed in this conference is the extremely accommodative monetary policy of the ECB.

The ECB adopted that extremely accommodative monetary policy almost five years ago, mostly in response to the global financial crisis and subsequent sovereign debt crisis that afflicted the euro area economies in 2011–12. By all standards, the ECB did what it had to do to ease monetary conditions to mitigate the contractionary effect of a financial crisis and provide liquidity to the financial system and the sovereigns. The ECB has also been mostly right in keeping monetary policy loose for as long as it had (some people disagree with this, but we, at the Fund, still are of the view that they were right).

But this policy of the ECB has created important spillovers for countries outside the euro area, like the Western Balkans and some countries in Central Europe. Those spillovers have taken several forms: deflationary pressures, downward pressures on interest rates, lower FX intermediation spreads, lower return on FX reserves, and upward pressure on the exchange rate.

The challenges brought about by these spillovers could not have been anticipated a few years ago, including because some of the policies adopted by the ECB were not considered “conventional.” But they have happened. And the central banks and other economic authorities of the neighboring countries have had to respond to this. The next two days will give us an opportunity to learn exactly what many of these countries have done, are doing, and are planning to do, to navigate these challenging times and mitigate the adverse effects of those spillovers on monetary policy, financial stability, as well as on FX reserve management.

I am very excited and looking forward to learning from all of you.

Miguel Savastano, International Monetary Fund, Deputy Director of the Monetary and Capital Markets (MCM) Department

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