Monetary policy and its effectiveness 1 10.9.2015 1. Commitment - PowerPoint PPT Presentation

Governor Erkki Liikanen Bank of Finland Monetary policy and its effectiveness 1 10.9.2015

1. Commitment to accommodative monetary policy benefits economic outlook Governor Erkki Liikanen Suomen Pankki – Finlands Bank – Bank of Finland 2 10.9.2015

Interest rate policy in 2014  Central bank interest rates reduced to the zero lower bound − Interest rate on main refinancing operations 0.05% (September 2014) − Interest rate on the deposit facility -0.20% (September 2014)  The full allotment policy safeguarding banks’ access to central bank refinancing will be continued at least until the end of 2016. Governor Erkki Liikanen Suomen Pankki – Finlands Bank – Bank of Finland 3 10.9.2015

The decisions to support provision of credit in 2014  Banks have access to longer-term central bank refinancing (maturing in 2018) at a fixed rate of 0.05% for provision of credit to the real economy (excl. housing).  Third purchase programme for covered bonds issued by banks (CBPP3) − Since October 2014, purchases conducted to the value of EUR 111 billion  Asset-backed securities purchase programme (ABSPP) − Since November 2014, purchases conducted to the value of EUR 11 billion Governor Erkki Liikanen Suomen Pankki – Finlands Bank – Bank of Finland 4 10.9.2015

The decisions on large scale asset purchases and forward guidance in January 2015  Expanded asset purchase programme  Bonds issued by euro area governments, government agencies and European institutions as a new target for purchases  Combined monthly asset purchases under the three programmes of EUR 60 billion from March 2015 until at least September 2016 (totalling EUR 1,140 billion) − The Bank of Finland will primarily buy Finnish government bonds (itself carrying the credit risk involved) and bonds issued by European institutions (for which the credit risk will be shared amongst Eurosystem central banks). − Forward guidance  Purchases are intended to run until the end of September 2016, or beyond, if necessary, and, in any case, until we see a sustained adjustment in the path of inflation consistent with our aim of achieving inflation rates below, but close to, 2% over the medium term. Governor Erkki Liikanen Suomen Pankki – Finlands Bank – Bank of Finland 5 10.9.2015

2. Large scale asset purchases stimulate both demand and inflation Governor Erkki Liikanen Suomen Pankki – Finlands Bank – Bank of Finland 6 10.9.2015

Signalling and portfolio balance effects of a large-scale asset purchase programme  The signalling effect contributes to re-anchoring inflation expectations more in line with the medium-term objective.  The portfolio balance effect extends the effects across the whole financial system even though only a comparatively narrow range of high-quality securities is purchased. – Investors are encouraged to shift holdings into other asset classes. Governor Erkki Liikanen Suomen Pankki – Finlands Bank – Bank of Finland 7 10.9.2015

ECB’s accommodative monetary policy  Lowers real interest rates and eases financing conditions in the economy − interest rates at the longer end decline, financing conditions for companies and households become easier, asset prices rise − higher inflation expectations mean lower real interest rates  Increases demand and boosts inflation − external value of the euro depreciates − consumption and the profitability of investments increase − corporate and household confidence improves Governor Erkki Liikanen Suomen Pankki – Finlands Bank – Bank of Finland 8 10.9.2015

Divergence in monetary policy cycles has weakened the euro EUR/USD 1.8 1.6 1.4 1.2 1 0.8 0.6 1999 2001 2003 2005 2007 2009 2011 2013 2015 Source: Macrobond. Governor Erkki Liikanen Suomen Pankki – Finlands Bank – Bank of Finland 9 10.9.2015

Renewed decline in oil price puts downward pressure on inflation Price of crude oil, Northern Sea Brent, USD/barrel (left-hand scale) Industrial commodities excl. energy, USD (right-hand scale) USD/barrel Index 2010 = 100 160 160 140 140 120 120 100 100 80 80 60 60 40 40 20 20 2008 2010 2012 2014 Sources: Bloomberg, HWWA and Bank of Finland. Governor Erkki Liikanen Suomen Pankki – Finlands Bank – Bank of Finland 10 10.9.2015

Commitment to accommodative monetary policy stance supports inflation expectations 2 year inflation swap 5 year inflation swap 10 year inflation swap % 3.5 3 Announcement of the EAPP 22 January 2015 2.5 2 1.5 1 0.5 0 -0.5 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: Bloomberg. Governor Erkki Liikanen Suomen Pankki – Finlands Bank – Bank of Finland 11 10.9.2015

Sharp fall in long-term bond yields over the past year, some reversal recently Germany Average yield on euro area government bonds (excl. Greece) % 6 5 4 3 2 1 0 2008 2009 2010 2011 2012 2013 2014 2015 *Weighted average of euro area countries’ 10-year government bonds (excl. Greece). Sources: Bloomberg and calculations by the Bank of Finland. Governor Erkki Liikanen Suomen Pankki – Finlands Bank – Bank of Finland 12 10.9.2015

Stock market turbulence in August United States: S&P 500 Euro area: DJ Euro Stoxx (broad) Japan: Nikkei China: Shanghai a share (right-hand scale) 4.1.2000 = 100 160 500 450 140 400 120 350 100 300 250 80 200 60 150 40 100 20 50 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: Bloomberg. Governor Erkki Liikanen Suomen Pankki – Finlands Bank – Bank of Finland 13 10.9.2015

3. Monetary policy transmission to the real economy is improving Governor Erkki Liikanen Suomen Pankki – Finlands Bank – Bank of Finland 14 10.9.2015

Monetary policy measures support bank lending Loan growth in euro area Non-financial corporations Households annual growth rate, % 4 3 2 1 0 -1 -2 -3 -4 2010 2011 2012 2013 2014 2015 Source: European Central Bank Loans adjusted for sales and securitisation Governor Erkki Liikanen Suomen Pankki – Finlands Bank – Bank of Finland 15 10.9.2015

Monetary policy transmission to non- financial corporations improved, but still uneven New corporate loan agreements, average interest Highly rated countries* GIIPS** Interest on the main refinancing operations % 7 6 5 4 3 2 1 0 2005 2007 2009 2011 2013 2015 Source: European Central Bank. * Germany, France, Netherlands, Belgium, Austria and Finland. ** Greece, Ireland, Italy, Portugal and Spain. Governor Erkki Liikanen Suomen Pankki – Finlands Bank – Bank of Finland 16 10.9.2015

Corporate bond yields remain low, some reversal recently 3-year AAA-grade 5-year AAA-grade 3-year BBB-grade 5-year BBB-grade % 10 9 8 7 6 5 4 3 2 1 0 2003 2008 2013 Source: Macrobond. Governor Erkki Liikanen Suomen Pankki – Finlands Bank – Bank of Finland 17 10.9.2015

Average interest rates on new housing loans have declined New mortgage loan agreements, average interest Highly rated countries* GIIPS** Interest on the main refinancing operations % 7 6 5 4 3 2 1 0 2005 2007 2009 2011 2013 2015 Source: European Central Bank. * Germany, France, Netherlands, Belgium, Austria and Finland. ** Greece, Ireland, Italy, Portugal, and Spain. Governor Erkki Liikanen Suomen Pankki – Finlands Bank – Bank of Finland 18 10.9.2015

4. The recovery in the euro area is expected to continue Governor Erkki Liikanen Suomen Pankki – Finlands Bank – Bank of Finland 19 10.9.2015

ECB staff projections in September (difference to Eurosystem staff June 2015 projections)  GDP: 2015: 1.4% (-0.1) 2016: 1.7% (-0.2) 2017: 1.8% (-0.2)  Inflation: 2015: 0.1% (-0.2%) 2016: 1.1% (-0.4%) 2017: 1.7% (-0.1%) Governor Erkki Liikanen Suomen Pankki – Finlands Bank – Bank of Finland 20 10.9.2015

Inflation outlook subdued in 2015-16 HICP inflation Core price inflation ECB forecast September 2015 % 5 4 3 2 1 0 -1 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 Sources: Macrobond and ECB. Governor Erkki Liikanen Suomen Pankki – Finlands Bank – Bank of Finland 21 10.9.2015

Finland falls further behind euro area growth  Latest Quarterly National Account release suggests moderate growth outlook continues.  Finland is not expected to reach the pace of euro area recovery during the forecast period.  The labour market situation has deteriorated since June 2015.  Euro area recovery bolsters exports, Russia weakens.  Temporary factors have had a relatively large negative impact on trade figures in 2015Q2. Governor Erkki Liikanen Suomen Pankki – Finlands Bank – Bank of Finland 22 10.9.2015

4. Financial stability and macroprudential policy Governor Erkki Liikanen Suomen Pankki – Finlands Bank – Bank of Finland 23 10.9.2015

The mandate of the ECB  Maintaining price stability will remain the primary objective of the ECB.  Without prejudice to price stability, the ECB will support the general economic policies in the EU, including balanced economic growth.  Financial stability is key to realizing this mandate.  The SSM regulation assigns macroprudential responsibilities to the ECB with power to apply tighter macroprudential requirements than the designated national macroprudential authorities. Governor Erkki Liikanen Suomen Pankki – Finlands Bank – Bank of Finland 24 10.9.2015