Concerning contagion, it is clear that both contagion across sovereign bond markets and contagion between sovereigns bonds and banks distort the working of all three channels on top of any idiosyncratic market malfunctioning. Faced with the risk of profound impairments of the transmission mechanism of monetary policy, the ECB has adopted several non-standard measures in order to maintain a stable relationship between its monetary policy stance and the conditions actually faced by households and firms. I will focus here on the Securities Markets Programme (SMP) adopted by the ECB in May 2010, given its direct relevance for addressing the malfunctioning of security markets. The programme was designed in the form of interventions in the euro area’s securities markets. The liquidity provided by the central bank via SMP interventions is fully re-absorbed by other liquidity operations. The liquidity neutrality of the SMP interventions is one feature making them distinct from “quantitative easing”, which has the very purpose of increasing the liquidity provided by the central bank.9 In addition, quantitative easing programmes have a numerical target for the amount to be purchased. This is not the case for the SMP. Finally, quantitative easing programmes have a much larger size, given their intended aim of “flooding” the market with liquidity. A better-fitting analogy may therefore be drawn between the SMP and sterilised exchange-rate interventions, which likewise do not necessarily have an announced target and aim to correct a misaligned asset price.
At the other end of the debate there are those such as Jeremy Stein who argue for the active use of monetary policy to lean against the wind because it “gets in all the cracks.” Or Jaime Caruana and his colleagues at the BIS who argue that it would be appropriate for advanced economy monetary policy to begin to normalise in order to head off emerging macroprudential risks. •  I will aim to show that there are merits to elements of all of these arguments. But where the institutional set up and full spectrum of macro-prudential tools are available, there is strong case for using monetary policy only as a last resort for tackling financial stability risks. I will try to illustrate this argument with experience from the UK. •  Let me start with a simple question: can monetary policy be used to lean against the wind? The answer to that question is “yes”, because monetary policy and macroprudential policy both affect financial conditions and clearly have implications for one another. •  To illustrate the implications of monetary policy for macroprudential policy, consider the example of Hong Kong, where the unusually low interest rates since 2009 (as a result of their peg to the US dollar) have fuelled sharply rising prices across a range of residential and commercial properties (He 2014).