As you know, OMTs, while ex-ante unlimited in time and amount, are strictly conditional upon the country implementing a programme making it eligible to financing from the European Stability Mechanism. 2  BIS central bankers’ speeches  3. By definition, “non-conventional” policies are highly innovative and central banks have made great efforts and devoted large resources to explaining their rationale and modalities. Nevertheless, there remain some misperceptions and concerns which I will briefly try to dispel and address. First, there are fears that the whole process of balance sheet expansion is inflationary. Indeed, one important effect of non-conventional policies is to significantly increase the quantity of central bank money in the economy. Since, ultimately, inflation is always and everywhere a monetary phenomenon, it may seem natural to anticipate further inflationary pressures down the road. While I understand these preoccupations, I do not see, in the current situation, any reason for concern. True, there has been a strong increase in central bank money and the situation should be monitored accordingly. What matters, however, for inflation, is the changes in broad monetary aggregates, which determine private agents’ ability to purchase goods, hence the price level. These broad aggregates have either remained unchanged or grown very slowly. What has happened, in fact, is that broad money has been substituted by central bank money as economic agents have felt the need to hold more liquid and safer assets. This expansion in central bank money has not affected inflation expectations, which have remained well-anchored.
To some extent, central banks have partly narrowed this gap between demand and supply by providing financial intermediaries with the safest and most liquid assets of all: their own liabilities, in the form of deposits and reserves held by banks. The importance and usefulness of this function is illustrated by the significant amounts still outstanding in the Eurosystem deposit facility or in the form of non-compulsory reserves. It is, indeed, in the essence of central banks’ historical function to step in when dislocations in financial markets appear and to contain long-lasting damage to the economy. If they fail to act, then self-fulfilling expectations could lead to panic and financial dislocation. A good example is the situation in the euro area in the second quarter of this year. Week after week, there were growing signs of a perceived “convertibility risk” between different parts of the euro area. However unfounded, these self-fulfilling fears destabilised capital flows and led to the rapid and increasing segmentation of financial and credit markets. Financial conditions were increasingly divergent across the euro area, irrespective of the quality of borrowers and the level of policy rates. If left unchecked, this process would have rendered monetary policy totally powerless to combat both inflation and deflation, if either of these risks had materialised. This was, for the Eurosystem, an unacceptable situation. It led the Governing Council to announce in September the introduction of the Outright Monetary Transaction (OMT) programme, whereby the Eurosystem may purchase government debt with a maturity of up to three years.