Bank of Lithuania
2017-10-27
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The quantitative easing (QE) programme, extended by the Eurosystem (the European Central Bank (ECB) and euro area central banks), will continue to exert a positive impact on the Lithuanian economy through two main channels. 

‘The QE programme is one of the main contributors that helped to break the grip of stagnation on the European economy, at the same time providing further boost to the Lithuanian economy. With the extension of the programme, even though cut in size, it will continue to stimulate the economy directly – through low lending rates for businesses, households and the government, and indirectly – through exports to recovering Europe,’ said Vitas Vasiliauskas, Chairman of the Board of the Bank of Lithuania. 

Yesterday the Governing Council of the ECB (the Chairman of the Bank of Lithuania being one of its members) decided that the expanded asset purchase programme (the QE programme), which was launched on 9 March 2015, will be extended for another nine months – until the end of September 2018. The programme centres on the idea that euro area central banks purchase large quantities of public and private sector debt securities in the secondary market. Injections of money into the financial market by purchasing large amounts of longer-term financial assets translate into more favourable funding conditions and fuel economic expansion. 

According to V. Vasiliauskas, the Governing Council of the ECB holds the position that in the context of a recovering economy, the easing effect of the monetary policy remains necessary, yet currently it may be maintained with less effort. Thus it was decided to scale back the monthly purchases of the asset purchase programme in the euro area from EUR 60 billion to EUR 30 billion starting from January 2018.

The Bank of Lithuania will continue to play an active role in the Eurosystem’s QE programme, purchasing Republic of Lithuania government securities and European supranational institution bonds. After two-and-a-half years of implementing the programme, such purchases already amount to EUR 8.6 billion, of which government securities account for approximately EUR 1.7 billion. Over the remaining months of this year, the Bank of Lithuania will purchase around EUR 0.85 billion in securities. With the extension of the programme, another roughly EUR 1 billion in such purchases is foreseen. Through the QE programme, the Eurosystem has purchased, in total, more than EUR 2 trillion worth of securities as of the end of September 2017. 

According to Bank of Lithuania calculations, due to the accommodative monetary policy instruments, Lithuania’s real GDP will be higher by a total of 1.0 p.p. in 2015–2017. Monetary policy instruments implemented by the Eurosystem have contributed significantly to lower interest rates for Lithuanian households and corporates as well as lower government debt management costs in terms of interest expenses. 

In a historic first, last year the Government of the Republic of Lithuania borrowed for a period of almost 5 years at negative interest rates, while this year the interest rates for the bond of 10-year maturity were at a record low – 1.1 per cent. In addition, for the first time, it borrowed for an astonishing 30-year period at low – 2.2 per cent – interest rates. It is estimated that the QE programme decreased Lithuania’s budgetary expenditure by EUR 26.4 million in 2015, and EUR 44.7 million in 2016.

The accommodative monetary policy of the Eurosystem also reduced the EURIBOR rates, which are taken into account when setting interest rates for businesses and households. Standing at 0.1 per cent in March 2015, one of the most popular EURIBOR interest rates – the 6-month EURIBOR – have dipped into the negative territory, reaching nearly –0.3 per cent this week.

It is estimated that due to the dampening effect of existing monetary policy instruments on lending interest rates, Lithuanian households managed to save EUR 4.1 million in 2015 and another EUR 9.0 million in 2016, while the positive impact of the programme on corporate interest expenditure in respective periods amounted to EUR 7.3 million and EUR 25.4 million. 

The Governing Council of the ECB intends to run the QE programme until it sees a sustained adjustment in the path of inflation that is consistent with its aim of achieving inflation rates below, but close to, 2 per cent over the medium term.

It is expected that the impact of the QE programme on inflation rates in Lithuania will be rather mild, attributing to approximately a tenth of the projected inflation this year. In the near future, inflation will be most affected by higher oil and other commodity prices, taxation changes, and rapidly growing wages which not only spur demand, but also ramp up business costs and the cost price of goods and services.