SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Bank of Finland Bulletin 4/2012 Monetary policy and...

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND

Bank of Finland Bulletin 4/2012Monetary policy and the global economy

Governor

Erkki Liikanen

12 September 2012

12.9.2012 Erkki Liikanen


Themes

Transmission of monetary policy in the euro area– ECB Governing Council decided on new measures last week– Market responses to the decisions– Transmission of monetary policy and condition of the real

economy

Bank of Finland forecast for the global economy– Second half of 2012 muted– Global economic growth will remain slow in 2012–2013– Risks to the forecast primarily on the downside



Transmission of monetary policy in the euro area:

Decisions of the ECB Governing Council



Decisions of the ECB Governing Council on 6 September

Governing Council decides to keep key interest rates unchanged– Interest rate on main refinancing operations 0.75%, standing facilities

corridor 0%–1.50%

– Policy rates are in line with price stability

Decision on a new programme: Outright Monetary Transactions (OMTs)– An appropriate monetary policy transmission and the singleness of the

monetary policy

– Conditionality: EFSF/ESM programme

– After this, the Governing Council’s decision in full discretion

– Target: purchases of programme countries’ short-term government bonds (≤ 3 years)



What do the decisions mean?

The programme is European in nature– Not for some countries against others– Applicable to all euro area countries, if necessary– The programme is in line with the ECB’s price stability mandate

Purchases concentrate on short-term instruments– Particularly government bonds, maturity 1–3 years– Close to traditional monetary policy– Short maturities also ease risk management



Transmission of monetary policy in the euro area:

Market responses to the decisions



4,0

4,5

5,0

5,5

6,0

6,5

7,0

7,5

8,0

03/2012 05/2012 07/2012 09/2012

Spain

Italy

source: Bloomberg.

%

Yields on Spanish and Italian 10 year government bonds



0,00

0,25

0,50

0,75

1,00

1,25

1,50

1,75

2,00

07/2011 10/2011 01/2012 04/2012 07/2012

France

Austria

Netherlands

Finland

Source: Bloomberg

%

Spread between highest rated 10-year government bonds and Germany



Spanish and Italian yield curves

12.9.2012

-1

0

1

2

3

4

5

6

7

3M 6M 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y

Spain 11 Sep 2012 Germany 11 Sep 2012 Italy 11 Sep 2012

Spain 1 Jun 2012 Germany 1 Jun 2012 Italy 1 Jun 2012

%

Source: Bloomberg

Erkki Liikanen


Stock markets

12.9.2012

40

50

60

70

80

90

100

110

120

130

140

2010 2011 2012

USA: S&P500 Germany Spain Italy

4 Jan 2010 = 100

Source: Bloomberg.26339@Pörssi-indikaattoreita (en)

Stock prices

Erkki Liikanen


0

1

2

3

4

5

6

7

5y sovereign CDSav. 5y CDS of some largest banks%-points

Source: Bloomberg and Bank of Finland calculations

0

1

2

3

4

5

6

7

8

5y sovereign CDSav. 5y CDS of some largest banks%-points

Sovereign and banks’ credit risk go hand in hand

Spain Italy



Monetary policy transmission in the euro area: Financial intermediation and the real economy



Interest rate differentials transmitted to the credit market

Housing loans Corporate loans

12.9.2012

0

0,5

1

1,5

2

2,5

3

3,5

2005 2007 2009 2011

High-rated countries* GIIPS** Euro area

% points

* Germany, France, the Netherlands, Belgium, Austria and Finland. ** Spain, Italy, Greece, Portugal ja Ireland.*** Variable interest housing loans linked to reference rates with a rate fixation period of at most 1 year.

Sources: ECB and Bank of Finland calculations.

Difference between new housing loans*** and 3-month Euribor

0

0,5

1

1,5

2

2,5

3

3,5

2005 2007 2009 2011


% points

* Germany, France, the Netherlands, Belgium, Austria and Finland. ** Spain, Italy, Greece, Portugal ja Ireland.Sources: ECB and Bank of Finland calculations.

Difference between new corporate loans and 3-month Euribor

Erkki Liikanen


Shrinking deposit and lending stocks in GIIPS countries

Loans to non-MFIs Deposits by non-MFIs

12.9.2012

-5

0

5

10

15

20

2005 2007 2009 2011


% of GDP

* Germany, France, the Netherlands, Belgium, Austria and Finland. ** Spain, Italy, Greece, Portugal ja Ireland.

Sources: ECB and Bank of Finland calculations.

Yleisön lainakannan vuosikasvu / BKT

-5

0

5

10

15

2005 2007 2009 2011


% of GDP

* Germany, France, the Netherlands, Belgium, Austria and Finland. ** Spain, Italy, Greece, Portugal ja Ireland.Sources: ECB and Bank of Finland calculations.

Yleisön talletuskannan vuosikasvu / BKT

Erkki Liikanen


-8

-6

-4

-2

0

2

4

6

2005 2006 2007 2008 2009 2010 2011 2012

% of GDP

Sources: ECB, Eurostat and Macrobond.* Sum of countries’ current accounts.

High-rated countries* GIIPS* Euro area

-15

-10

-5

0

5

10

15

Ireland Portugal Spain Italy Germany Finland France

Wages/hour Productivity/hour Unit labour costs

Source: Eurostat.

% change 2009 Q1 - 2012 Q1

Progress of euro area adjustment: Competitiveness and indebtedness

Unit labour costs Current account



95

100

105

110

115

120

125

2000 2005 2010


2000Q1 = 100

*Germany, France, the Netherlands, Belgium, Austria and Finland.** Greece (11-12 estimate), Ireland, Italy, Portugal and Spain.Sources: Eurostat and Bank of Finland calculation.

GDP

Major differences remain, turnaround still far away



What has improved since the spring?Clear division of crisis management duties

Crisis countries’ own measures– Correction of structural distortions in the economy

EU/IMF measures– Programmes, conditionality, safeguarding of bridge financing

ECB measures– Safeguarding the operation of markets– Decisions of 6 September 2012

All three measures and clear division of duties essential



Forecast for the global economy



Industrial and consumer confidence at low levels

Purchase managers’ indices Consumer confidence

12.9.2012

25

30

35

40

45

50

55

60

65

2007 2008 2009 2010 2011 2012

USA Euro area Japan China Brazil

Balance

Source: Bloomberg.25200@PMI_teollisuus (enET)

Purchase managers' indices: manufacturing

-40

-35

-30

-25

-20

-15

-10

-5

0

20

30

40

50

60

70

80

90

100

2007 2008 2009 2010 2011 2012

USA Japan Euro area (RHS)

Balance Balance

Sources: European Commission and Bloomberg.25200@Chart87 (enET)

Consumer confidence indicators

Erkki Liikanen


Unemployment on the increase, especially in euro area

Main economic regions Euro area, specified

12.9.2012

0

2

4

6

8

10

12

2007 2008 2009 2010 2011 2012

Euro area USA Japan Finland Brazil

%

Sources: BLS, Eurostat, Bloomberg and Statistics Finland.23162@Työttömyys% (FI+B) en

5

7

9

11

13

15

17

19

2005 2006 2007 2008 2009 2010 2011 2012


%

* Germany, France, the Netherlands, Belgium, Austria and Finland.** Spain, Italy, Greece, Portugal and Ireland.Sources: ECB and Bank of Finland calculations.

Unemployment

Erkki Liikanen


Inflation and commodity prices

Consumer price inflation Commodity prices

12.9.2012

-4

-2

0

2

4

6

8

10

2007 2008 2009 2010 2011 2012

USA Euro area Japan China Brazil Finland

% change from previous year

Source: National statistical authorities.25200@Kuluttajahinnat (enET)

Consumer prices

Erkki Liikanen

0

20

40

60

80

100

120

140

0

20

40

60

80

100

120

140

160

1999 2001 2003 2005 2007 2009 2011 2013

Crude oil, North Sea Brent, USD/barrel

Industrial raw materials excl. energy, USD (Right hand scale)

USD / barrel Index 2010 = 100

Sources: Bloomberg and HWWI.


Bank of Finland forecast assumptions

Financial crisis can be brought under control with adequate policy measures– At national level: fiscal consolidation and structural measures– At EU level: EFSF/ESM (programmes) and bank packages– Eurosystem measures conditional on implementing the above

Austerity measures weaken growth over the short term – Increasing confidence will lower the general level of interest

rates– Slow adjustment of debt and competitiveness in crisis countries– Growth outside crisis countries will pick up more quickly

=> Uncertainty is set to prevail for a long time



Main outcomes of the Bank of Finland forecast:GDP and world trade

% change on previous year (previous forecast in brackets)

GDP 2011 2012f 2013f 2014f

United States 1.8 2.2 2.2 2.6

(2.3) (2.6) (2.5)

EU20 1.4 -0.4 0.4 1.4

(-0.2) (1.0) (1.6)

Japan -0.7 2.5 0.6 1.1

(1.4) (1.5) (1.7)

Non-Japan Asia 7.7 6.3 6.6 6.3

(6.6) (7.2) (6.8)

World 3.9 3.2 3.5 3.7

(3.2) (3.9) (3.9)

World trade 6.2 3.1 4.8 6.0

(3.5) (5.8) (6.3)

EU20 = Euro area, Sweden, Denmark and United Kingdom



Main outcomes of the Bank of Finland forecast: inflation

12.9.2012

-3

-2

-1

0

1

2

3

4

5

6

2008 2009 2010 2011 2012 2013 2014

Inflation, EU20 Inflation forecast, EU20Inflation, USA Inflation forecast, USAInflation, Japan Inflation forecast, Japan

%

Sources: National statistical authorities and Bank of Finland calculations.25276@eInf laatio (enET)

Erkki Liikanen


-12

-10

-8

-6

-4

-2

0

2

Euro

area

Germ

any

Fran

ce Italy

Espa

in

Unite

d King

dom

Unite

d Stat

es Japan

Budget deficit, autumn 2011 forecastImpact of cyclical conditionsImpact of discretionary measuresImpact of other factorsBudget deficit, Bank of Finland autumn 2012 forecast

% of GDP (2013)

Sources: European Commission projections and calculations by Bank of Finland.

-12.0

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

2.0

Euro

area

Germ

any

Fran

ce Italy

Espa

in

Unite

d King

dom

Unite

d Stat

es Japan

Budget deficit, autumn 2011 forecastImpact of cyclical conditionsImpact of discretionary measuresImpact of other factorsBudget deficit, Bank of Finland autumn 2012 forecast

Sources: European Commission projections and calculations by Bank of Finland.

% of GDP (2012)

General government deficits cannot be corrected without further measures

2012 2013



Risks mainly on the downside

Main downside risks relate to the euro area situation– Measures turn out to be inadequate (data, decisions,

implementation)– Growth expectations critical for credible debt sustainability – Failure in breaking the vicious circle

Fiscal risks also significant in the United States– Positive forecast assumption: no shock adjustment from the

beginning of 2013– In the absence of agreement on adjustment, fiscal policy would

be tightened abruptly– A halt in US economic growth would have wide spillover effects



There are also upside risks

Confidence may improve faster than assumed– A clear division of crisis management duties to solve the debt

problem– Credibility would be restored more quickly than in the baseline– Interest rates would decline more rapidly– Adjustment measures easier to carry out in a more favourable

growth environment

Positive signs in the US economy– The worst phase of private-sector adjustment could be over– Abundant pent-up demand in the housing market– Rising asset prices could trigger a virtuous circle


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SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Bank of Finland Bulletin 4/2012 Monetary policy and...

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