V.Vasiliauskas: Following extension of easing programme by Eurosystem, low interest rates will further prevail in Lithuania

‘The Eurosystem’s easing programme undertaken last spring has justified itself by enabling to avoid economic recession and a deflationary spiral, detrimental to the economy. Today, we are sending to heads of euro area central banks a fundamental message: stimulation of the economy through wide-scale asset purchasing is being continued, while low interest rates will be retained by us throughout 2017 and beyond,’ said Vitas Vasiliauskas.

It was planned to implement the current asset purchase programme at least by next March; however, it has been extended for another nine months, until December 2017, reducing the amount of securities being purchased per month from currently EUR 80 billion to EUR 60 billion.

According to Vasiliauskas, the large-scale purchase of securities and the sharp cutting of interest rates eased the debt burden and encouraged crediting, which added strength to economic growth. Both residents and businesses in Lithuania and across the euro area felt this.

For instance, in 2015–2016 (until and including October), average 3-month interest rates on new loans to businesses in the euro area dropped by 0.6 percentage points, in Lithuania – by 0.4 percentage points. Due to lower interest rates, businesses in Lithuania saved EUR 28 million, residents – about EUR 11 million.

The Bank of Lithuania implements the Eurosystem’s easing programme by purchasing bonds of the Government of the Republic of Lithuania and European institutions in secondary markets.

Since October 2015 the Bank of Lithuania has started purchasing government bonds, issued in the domestic market, by holding auctions. As many as over a hundred of them have been held and securities have been purchased for EUR 400 million to date. The Bank of Lithuania has already purchased a total of securities worth EUR 6 billion, of which about a fourth (EUR 1.5 billion) were precisely debt securities of the Government of the Republic of Lithuania issued in the domestic and foreign markets.

These purchases helped reduce the cost of the state debt. For instance, the interest rate on the debt securities of the Government of the Republic of Lithuania with a maturity of 8 years dropped by nearly a half – from 1.5 per cent to 0.6 per cent, while in August this year, the Government borrowed at negative interest for the first time in history. Investors paid additionally for bonds with a maturity of 3 and 5 years. The decline in interest payments entails widening possibilities for the state to finance other areas.  

Had the Eurosystem not implemented a wide-scale accommodative monetary policy, economic development in the euro area would have been 1.6 percentage points or, on average, by a fifth weaker. Our country’s economy is being positively affected by the accommodative monetary policy mainly via the export sector due to higher demand from the euro area. The cumulative effects of the accommodative monetary policy are likely to increase our country’s real GDP growth and inflation by 1.0 p.p. and 1.4 p.p. respectively. It is projected that euro area GDP growth will strengthen to 1.6 per cent and inflation will rise to 1.7 per cent. The Bank of Lithuania plans to publish the forecast for the Lithuanian economy on 20 December.

‘The actions of central banks have helped win some time. Unfortunately, this time is not being used effectively by the governments of euro area countries in addressing basic euro area issues in the labour market, financial sector, as well as in easing the bureaucratic burden for businesses. Only determination to recognise the issues and prompt solutions can help ensure long-term well-being and suppress destructive populist sentiments,’ said Vasiliauskas.

The expanded asset purchase programme comprises bonds of euro area governments, EU institutions and enterprise bonds, covered bank bonds, and asset-backed securities. Its implementation started in the autumn of 2014, when a decision was made to purchase covered bank bonds and asset-backed securities. It was expanded significantly in January 2015, by supplementing it with bonds of euro area governments and EU institutions, as well as envisaging purchasing securities worth EUR 60 billion. In December 2015 the programme was extended to March 2017 (for another 6 months), while in March 2016, the amount of securities purchased per month was increased to EUR 80 billion, including additionally enterprise bonds in the list of assets to be purchased. In addition to the asset purchase programme, ECB interest rates were cut on several occasions and targeted long-term refinancing operations were published in 2014–2016.

Key ECB interest rates on the deposit facility, main refinancing operations, and marginal lending facility currently are 0.4 per cent, 0 per cent and 0.25 per cent respectively. 

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