Governor Erkki Liikanen Bank of Finland - Suomen …...Commitment to accommodative monetary policy...

Bank of Finland

Monetary policy and its transmission to the economy

19.6.2015

Governor Erkki Liikanen

Suomen Pankki – Finlands Bank – Bank of Finland

1. Commitment to accommodative monetary policy benefits the economic outlook

9.6.2015 Governor Erkki Liikanen 2


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.



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 85 billion

Asset-backed securities purchase programme (ABSPP)

− Since November 2014, purchases conducted to the value of EUR 7 billion



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 will be continued, if necessary, even after September 2016 until the Governing Council of the ECB considers the inflation rate has returned to levels consistent with the price stability objective.



2. Large scale asset purchases stimulate both demand and inflation



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.



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



Commitment to accommodative monetary policy stance has already raised inflation expectations

-1

-0,5

0

0,5

1

1,5

2

2,5

3

3,5

4

2004 2006 2008 2010 2012 2014

1-year 5-year 5-year 5 years ahead

%

Source: Bloomberg.



Divergence in monetary policy cycles reflected in the euro

0,6

0,8

1

1,2

1,4

1,6

1,8

1999 2001 2003 2005 2007 2009 2011 2013 2015

EUR/USD

Source: Macrobond.



Sharp fall in long-term bond yields over the past year, some reversal recently

0

1

2

3

4

5

6

2008 2009 2010 2011 2012 2013 2014 2015

Germany Average yield on euro area government bonds (excl. Greece)%

*Weighted average of euro area countries’ 10-year government bonds (excl. Greece).Sources: Bloomberg and calculations by the Bank of Finland.



Stock prices have increased

40

60

80

100

120

140

160

2007 2008 2009 2010 2011 2012 2013 2014 2015

United States: Morgan Stanley (world, developed economies)Euro area: DJ EURO Stoxx (broad)Japan: NikkeiUnited States: S&P 500

4 Jan 2007 = 100

Source: Bloomberg.

Share prices



3. Monetary policy transmission to the real economy is improving



Monetary policy measures support bank lending

-4

-3

-2

-1

0

1

2

3

4

2010 2011 2012 2013 2014 2015

Non-financial corporations Households

% change on previous year

Source: European Central Bank.Adjusted for securitisation and balance sheet transfers.

Pace of growth in euro area loan stock



Monetary policy transmission via bank lending is improving


-10123456789

-10123456789

2008 2010 2012 2014

Average interest on stock of depositsAverage interest on new fixed-term deposits3-month EuriborESCB's minimum bid rateAverage yield on covered bonds (EUR)Average yield on unsecured senior bonds (EUR)

%

Sources: ECB and Barclays.

Banks' funding costs

%


Monetary policy transmission to non-financial firms improved, but still uneven


0

1

2

3

4

5

6

7

2005 2007 2009 2011 2013 2015

Highly rated countries*GIIPS**Interest on the main refinancing operations%

Source: European Central Bank.* Germany, France, Netherlands, Belgium, Austria and Finland.** Greece, Ireland, Italy, Portugal and Spain.

New corporate loan agreements, average interest


Corporate bond yields remain low, some reversal recently


0

1

2

3

4

5

6

7

8

9

10

2003 2008 2013

3-year AAA-grade 5-year AAA-grade3-year BBB-grade 5-year BBB-grade%

Source: Macrobond.


Corporate sector debt ratios declining


95

100

105

110

115

120

125

130

2000 2004 2008 2012

% of value added % of GDP

Index, 100 = 2000Q1

Sources: Bank of France and Bank of Finland calculations.


Average interest rates on new housing loans have declined


0

1

2

3

4

5

6

7

2005 2007 2009 2011 2013 2015

New mortgage loan agreements, average interestHighly rated countries*GIIPS**Interest on the main refinancing operations%

Source: European Central Bank.* Germany, France, Netherlands, Belgium, Austria and Finland.** Greece, Ireland, Italy, Portugal, and Spain.


Eurosystem projections in June 2015

GDP:2015: 1.5%2016: 1.9%2017: 2.0%

Inflation:2015: 0.3%2016: 1.5%2017: 1.8%

20Governor Erkki Liikanen9.6.2015


Inflation outlook has improved


-1

0

1

2

3

4

5

1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

HICP inflation Core price inflation ECB forecast June 2015

%

Sources: Macrobond and ECB.31546@chart4(2)


4. Financial stability and macroprudential policy



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 macroprudentialresponsibilities to the ECB with power to apply tighter macroprudential requirements than the designated national macroprudential authorities.


Suomen Pankki – Finlands Bank – Bank of Finland9.6.2015 Governor Erkki Liikanen 24

The ECB’s role in the new supervisory architecture

Governing CouncilMonetary Policy:

Price Stability

Macro-prudential Policy:Financial stability

Sources: Smets (2013) and Bank of Finland.

Financial and economic stability

Supervision offinancial institutions

Euro area EU

European SystemicRisk Board (ESRB)

European SupervisoryAuthorities

(EBA, ESMA, EIOPA)

European Central Bank (ECB)

ECB/SSM

Bank Supervision:Solvency and resilience of

individual banks


The ECB reinforces but cannot substitute national macroprudential policies

National macroprudential authorities bear the main responsibility in detecting systemic risks and taking appropriate macroprudential action.

National macroprudential action should be timely, bold and intrusive.

The ECB can reduce the inaction bias inherent in national macroprudential policies.



Macroprudential policy is important in a time of exceptionally accommodative monetary policy

Negative side-effects of accommodative monetary policy cannot be entirely ruled out:

− a prolonged low level of interest rates and the additional relaxation brought by securities purchases could inflate the risks to financial stability;

− the euro area must maintain readiness to actively deploy macroprudential policy tools if required;

− Every Member State must have an effective macroprudential toolbox.



5. Transparency improves the accountability and effectiveness of monetary policy



Transparency is an important tool for an independent central bank like the ECB– The days of ‘never excuse, never explain’ and central banks acting as

opaque and secretive institutions are over.

Transparency facilitates accountability and efficiency– The ECB is accountable to achieve its mandate, price stability.– Conveying the Governing Council’s ‘reaction function’ facilitates efficiency

and makes it is easier to attain monetary policy objectives.

The accounts convey a balanced account of discussions in the Governing Council– They provide a fair and balanced summary of the main arguments.– The language reflects collegiate, consensus-oriented mode of discussion and

decision-making. 28Erkki Liikanen10.6.2015

Transparency, accountability and efficiency: Accounts of the monetary policy meetings


Thank you!


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Governor Erkki Liikanen Bank of Finland - Suomen …...Commitment to accommodative monetary policy...

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