UBI Banca Group

Monetary policy action taken by the European Central Bank (ECB) at the same time as the
intervention described above also became particularly incisive.
With increasing tensions on financial markets, an unfavourable outlook for growth and inflationary
pressures slackening, the new governing council of the ECB reduced the interest rate on principal
refinancing operations by 25 basis points in each of its meetings at the beginning of November and the
beginning of December, bringing it down to 1% thereby eliminating the effect of the two increases made in
April and July 7 .
New measures were decided in December to support the liquidity of banks and their lending to households
and businesses consisting of two refinancing operations with a maturity of 36 months, full allotment of bids
and rates equal to the average of the principal refinancing rate over the duration of the operation, for which
an early redemption option was provided after one year 8 . It was also decided to broaden the range of
assets eligible as collateral for refinancing operations, by reducing the rating requirements for some ABS
instruments and by allowing national central banks the autonomy to accept bank loans which meet precise
conditions of eligibility. Finally, starting from the first maintenance period in 2012, the compulsory reserve
requirement for banks was reduced by 2% to 1% in order to free up liquidity and support money market
activities. The programme to purchase covered bonds issued by banks up to a total of €40 billion was also
resumed in November.
* * *
The difficult path to normal
market conditions will firstly
require concrete application of
the new economic governance
rules recently approved by the
EU. At the same time it will be
important to rapidly render the
mprovements to European
financial stability tools, such as
the EFSF and ESM, operational,
increasing their effectiveness
and quickly exploiting their
power.
1,62
1,58
1,54
1,50
1,46
1,42
1,38
1,34
1,30
1,26
1,22
1,18
1,14
Euro-dollar and dollar-yen exchange rates (2009-2011)
€/$ $/Yen (scala dx.)
Graph No.2
103
101
99
97
95
93
91
89
87
85
83
81
79
By raising doubts over the
future of the single currency,
the sovereign debt crisis has
caused the euro to depreciate
against all the main
international currencies. As
shown in Graph No. 2, after a
temporary recovery when it
exceeded 1.48 dollars to the
euro, the single currency has
fallen sharply, especially since
August. In the first few weeks of
the new year it showed signs of
recovery as pressures on
financial markets eased.
1,10
1,06
J G F M A M GJ LJ A S O N D GJ F M A M GJ J L A S O N D J G F M A M J G J L A S O N D
2009 2010
2011
The main exchange rates and oil (Brent) and commodities prices at the end of
the period
Dec-11
A
Sept-11
B
Jun-11
C
Mar-11
D
Dec-10
E
% change
A/E
Euro/Dollar 1.2945 1.3384 1.4504 1.4165 1.3377 -3.2%
Euro/Yen 99.57 103.11 116.79 117.77 108.60 -8.3%
Euro/Yuan 8.1449 8.5363 9.3747 9.2757 8.8148 -7.6%
Euro/Franc CH 1.2133 1.2151 1.2185 1.3009 1.2486 -2.8%
Euro/Sterling 0.8328 0.8587 0.9037 0.8833 0.8572 -2.8%
Dollar/Yen 76.94 77.04 80.52 83.15 81.15 -5.2%
Dollar/Yuan 6.2939 6.3780 6.4635 6.5483 6.5900 -4.5%
Futures - Brent (in $) 107.38 102.76 112.48 117.36 94.75 13.3%
CRB Index (commodities) 305.30 298.15 338.05 359.43 332.80 -8.3%
Source: Thomson Financial Reuters
77
75
7 Outside the euro area monetary policies in the main advanced economies remained strongly expansionary. The Federal Reserve
announced its intention to maintain the interest rate on federal funds unchanged at 0-0.25% until the end of 2014 and it continued
to change the composition of its government securities portfolio, designed to lengthen average maturities, and to reinvest the
proceeds of mortgage-backed securities in similar instruments. Both the Bank of England and the Bank of Japan left their
reference interest rates unchanged at 0.5% and 0-0.1% respectively and continued with their securities purchasing programmes.
The central banks of the main emerging countries started to gradually slacken monetary conditions in the last few months of 2011.
At the beginning of December China reduced its compulsory reserve requirements by 50 basis points to 21% after six rises
performed in the first part of the year when bank lending rates were also raised three times to 6.56%. The reference rate in Brazil,
which now stands at 9.75%, was cut five times by in August, October, November, January and February 2012, after five increases
made between January and July 2011. In Russia the reference rate fell by 25 bp in December to 8%, after two rises in February and
May. On the other hand the Indian central bank, concerned over continuing high levels of inflation, progressively increased its
reference rate to 8.50%, with seven consecutive rises.
8 A total of 523 banks took part in the first operation conducted on 21 st December 2011 and they obtained funds of approximately
€490 billion. The actual injection of new liquidity by the Eurosystem, net of maturing operations, amounted to approximately €210
billion. In the second operation performed on 29 th February 2012, the ECB made loans of €529.5 billion to 800 banks who made
bids.
21