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
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
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
12.9.2012 Erkki Liikanen
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
Transmission of monetary policy in the euro area:
Decisions of the ECB Governing Council
12.9.2012 Erkki Liikanen
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
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)
12.9.2012 Erkki Liikanen
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
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
12.9.2012 Erkki Liikanen
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
Transmission of monetary policy in the euro area:
Market responses to the decisions
12.9.2012 Erkki Liikanen
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
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
12.9.2012 Erkki Liikanen
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
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
12.9.2012 Erkki Liikanen
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
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
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
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
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
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
12.9.2012 Erkki Liikanen
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
Monetary policy transmission in the euro area: Financial intermediation and the real economy
12.9.2012 Erkki Liikanen
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
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
High-rated countries* GIIPS** Euro area
% 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
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
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
High-rated countries* GIIPS** Euro area
% 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
High-rated countries* GIIPS** Euro area
% 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
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
-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
12.9.2012 Erkki Liikanen
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
95
100
105
110
115
120
125
2000 2005 2010
High-rated countries* GIIPS** Euro area
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
12.9.2012 Erkki Liikanen
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
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
12.9.2012 Erkki Liikanen
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
Forecast for the global economy
12.9.2012 Erkki Liikanen
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
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
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
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
High-rated countries* GIIPS** Euro area
%
* Germany, France, the Netherlands, Belgium, Austria and Finland.** Spain, Italy, Greece, Portugal and Ireland.Sources: ECB and Bank of Finland calculations.
Unemployment
Erkki Liikanen
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
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.
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
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
12.9.2012 Erkki Liikanen
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
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
12.9.2012 Erkki Liikanen
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
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
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
-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
12.9.2012 Erkki Liikanen
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
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
12.9.2012 Erkki Liikanen
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
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
12.9.2012 Erkki Liikanen