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SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
Bank of Finland Bulletin 1/2012Monetary Policy and the Global Economy
Governor
Erkki Liikanen
15 March 2012
15.3.2012 1Erkki Liikanen
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
Themes
The markets, a cyclical snapshot and the forecast– Market developments and cyclical indicators
– Assumptions and the Bank of Finland forecast for the global economy
– Forecast risks
Major differences within the euro area– Condition of public finances
– Youth unemployment
Recent monetary policy measures– Global monetary policy stance
– Steps taken by the Eurosystem
15.3.2012 Erkki Liikanen 2
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
Market developments and cyclical indicators
15.3.2012 Erkki Liikanen 3
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
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
Major changes in confidence
15.3.2012 Erkki Liikanen 4
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
-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 indicator
Major changes in confidence
15.3.2012 Erkki Liikanen 5
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
40
50
60
70
80
90
100
110
2008 2009 2010 2011 2012
Europe (DJ Euro Stoxx wide) USA (S&P 500)
Japan (Nikkei 225)
Index, 4.1.2008=100
Source: Bloomberg.19002@stocks_main2_en
This is also reflected on the stock markets
Erkki Liikanen15.3.2012 6
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
Some improvement on the government bond markets
Erkki Liikanen15.3.2012
0
2
4
6
8
10
12
14
16
18
2008 2009 2010 2011 2012
Source: Reuters.
Portugal
Ireland
Italy
Spain
Germany
Finland
25874
10 year government bond yield, %
7
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
Stabilisation measures
The monetary policy decisions of the ECB-council– e.g. three year LTROs
The EU level decisions made in early December– ’Six-pack’ entered into force on 13th December – ’Fiscal compact’
Decisions taken at national level– The stabilisation programmes in Italy and Spain– Agreement on the 2nd package of Greece
15.3.2012 Erkki Liikanen 8
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
0
1
2
3
4
5
6
2005 2006 2007 2008 2009 2010 2011 2012
ECB Main Refinancing RateInterbank overnight rate Eonia
%
Sources: ECB and Reuters. 25384@Chart27 (en)
ECB liquidity facility rate
ECB overnight deposit facility rate
Cut in policy rate and expansion in central bank credit have relaxed monetary conditions in the
euro area
15.3.2012 Erkki Liikanen 9
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
-2
0
2
4
6
8
10
12
14
16
2007 2008 2009 2010 2011 2012
Euro area Finland
MFI loans to private sector, y/y, %
Sources: European Central Bank and Bank of Finland.
Country specific differences in financial conditions are still large
Euro area Finland
15.3.2012 Erkki Liikanen
25827
-4
-2
0
2
4
6
8
10
12
14
16
2005 2007 2009 2011
Non-financial corporations Households
%
Source: ECB.25840@Chart48 (en)
Yritys- ja kotitalouslainojen vuosikasvu*
10
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
Six-PackCoordination of Economic Policies
Amendments related to:Sanctions in Stability and Growth Pact Two-PackCorrection of macroeconomic imbalances Budgetary surveillance:Sanctions for macroeconomic imbalances Euro area countries
EDP countriesExcessive Deficit Procedure (EDP) Countries with serious risk
Amendments related to: of financial instabilitySanctions in Stability and Growth PactFiscal framework
Lisbon Treaty
Broad guidelinesfor economic policy
Avoidance ofexcessive deficits
Special rules foreuro area countries
European crisis management framework
15.3.2012 Erkki Liikanen
Treaty on strengthening of economic policiesMedium-term objective for structural budget deficit
-1/2 % of GDP (main rule, -1% in exceptional cases)Automatic correction mechanism incorporated innational legislations
Assessing excessiveness of deficitsAs the main rule, contracting parties supportCommission proposals
Fiscal Compact
11
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
Bank of Finland‘s global economy forecast
15.3.2012 Erkki Liikanen 12
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
Assumptions for Bank of Finland’s international forecast
15.3.2012
Multidimensional uncertainty– Economic uncertainty,– Political uncertainty, …
Assumption: action is taken to calm down the crisis– Euro area countries adhere to their promised adjustment
measures in respect of both 1) adjustment of debt levels and 2) strengthening the foundations of growth
– Contributes to public confidence and lower interest rates
Finding a new balance is a slow and gradual process– Restoring credibility and correcting high debt levels take
time
Erkki Liikanen 13
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
Bank of Finland’s forecast outcomes
15.3.2012
GDP 2010 2011f 2012f 2013f 2014f
United States 3,0 1,7 2,3 2,6 2,5 (1,5) (1,9) (2,6) EU20 1,9 1,5 -0,2 1,0 1,6 (1,6) (0,9) (1,6) Japan 4,5 -0,9 1,4 1,5 1,7 (-0,6) (2,4) (1,3) China 10,4 9,2 8 8 7 (9) (8) (8) Russia 4,3 4,3 3,7 3,7 3,4 (4,4) (4,4) (3,6) World 5,3 3,8 3,2 3,9 3,9 (3,9) (3,6) (4,0) World trade 13,7 6,0 3,5 5,8 6,3 (6,2) (6,1) (7,1)
f = forecast
% change on the previous year (previous forecast in brackets).
Source: Bank of Finland.
Erkki Liikanen 14
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
Inflation slows during the current year
Inflation Inflation expectations
15.3.2012 Erkki Liikanen
-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
1,5
2
2,5
3
3,5
4
2007 2008 2009 2010 2011 2012
Market expectations, euro area Market expectations, United States
SPF-survey, euro area SPF-survey, United States%
Inflation expectations based on 5-year inflaation swaps. 3- day moving averages.SPF-survey 5 years ahead.Sources: Bloomberg, ECB, Fed of Philadelphia and Bank of Finland calculations.25456@ET 2012-1 (en)
5-years inflation expectations 5-years time
15
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
94
96
98
100
102
104
106
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14
Why is this crisis different:slow recovery from financial crises
Horizontal axis: time since peak in quarters.Vertical axis: median of observations, index: peak = 100.Sources: IMF WEO April 2009, Eurostat, BEA, and Statistics Finland.
Recessions excl. financial crisesRecessions related to financial crises
GDP
USA 2008–Euro area 2008–Finland 2008–
25856
Erkki Liikanen15.3.2012 16
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
Risks to the forecast mainly on the downside
Recovery from the debt crisis a slow and uneven process – A positive spiral may come to a halt abruptly and unexpectedly
– Reasons: failure in carrying out adjustment programmes, market reactions to weaker-than-expected data releases, …
Euro area countries’ ability to implement reforms of critical importance– How is crisis countries’ external balance adjusted?
– How does the adjustment affect the credibility of the euro area as a whole?
– How far is it necessary to go to find the new balance?
There are also positive risks– Recent developments in the United States
15.3.2012 Erkki Liikanen 17
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
Major internal differences in the euro area
15.3.2012 Erkki Liikanen 18
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
Faster inflation than elsewhere and the resultant low level of real interest rates led to over-indebtedness in GIPS countries
15.3.2012 Erkki Liikanen
Developments in euro area countries’ consumer prices vis-à-vis Germany, 1999-2011.
95
100
105
110
115
120
125
other EA countries Ireland GreeceSpain Portugal Euro areaGermany
Source: Eurostat
Index, 1999 = 100
25005
19
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
Fiscal policy faces important challenges
Projected Deficit
Objectives of Stability and Convergence Programmes*
2011 2011 2012 2013
Euro area -4,3 -4,3 -3,1 -2,1
Germany -1,1 -2,5 -1,5 -1,0
France -5,7 -5,7 -4,6 -3,0
Italy -3,9 -3,9 -1,6 0,0
Spain -8,5 -6,0 -4,4 -3,0
UK .. -8,6 -7,8 -6,5
US .. -9,5 -8,0 -6,4
* UK and US figures are IMF projections for deficit.Sources: IMF, European Commission and announcements by countries .
15.3.2012 Erkki Liikanen 20
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
Italy, Spain and France implementing strongest adjustments
2012 2013
15.3.2012 Erkki Liikanen
Spain34 %
France17 %
Italy28 %
Netherlands10 %
Other euro area
countries11 %
Euro area Fiscal Consolidation -Country Breakdown
Sources: IMF, European Commission, announcements by countries and Bank of Finland calculations.
Spain16 %
France35 %
Italy28 %
Other euro area countries
21 %
Euro area Fiscal Consolidation -Country Breakdown
Sources: IMF, European Commission, announcements by countries and Bank of Finland calculations.
21
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
Italy, Spain and France implementing strongest adjustments
2012 2013
15.3.2012 Erkki Liikanen
Spain29 %
France18 %
Italy30 %
Netherlands10 %
Other euro area countries
13 %
Euro area Fiscal Consolidation - Country Breakdown
Sources: IMF, European Commission, announcements by countries and Bank of Finland calculations.
Spain25 %
France31 %
Italy25 %
Other euro area countries
19 %
Euro area Fiscal Consolidation - Country Breakdown
Sources: IMF, European Commission, announcements by countries and Bank of Finland calculations.
22
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
05
101520253035404550
2007
2011
2007
2011
2007
2011
2007
2011
2007
2011
2007
2011
2007
2011
2007
2011
Spain Portugal Ireland Italy Sweden Finland Germany Euro area
%Youth All
Source: Eurostat.
Unemployment and youth unemployment
Large differences in youth unemployment by country
15.3.2012 Erkki Liikanen 23
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
Financial crisis affected different areas in different countries
15.3.2012 Erkki Liikanen
-18
-15
-12
-9
-6
-3
0
3
6
Ireland Spain Finland Italy France Germany
Change in number of jobsShare of construction sectorShare of industry
Sector specific employment trends
% change
Change calculated between post 2005 employment peak and employment situation in 2011/Q3.Source: Eurostat
24
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
Recent monetary policy measures
15.3.2012 Erkki Liikanen 25
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
Monetary policy globally accommodative
Central bank interest ratesCentral bank balance sheets
15.3.2012
0
1
2
3
4
5
6
7
2003 2005 2007 2009 2011
USA: fed funds target rateJapan: over night rateEuro system: main refinancing rate*UK: repo rateSweden: repo rate%
* To 15 Oct 2008, minimum bid rateSource: Bloomberg. 25200@Keskuspankkikorkoja (enET)
Central Bank policy rates
Erkki Liikanen
0
5
10
15
20
25
30
35
2007 2008 2009 2010 2011 2012
FED BOJ ECB BOE Riksbank
% of GDP
Sources: National statistical authorities, Eurostat ja Bloomberg.25200@KP_taseet (enET)
Central Bank balance sheets
26
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
On Eurosystem monetary policy
Standard monetary policy measures– Key interest rates reduced on two occasions to 1%.
Non-standard monetary policy measures– Three-year longer-term refinancing operations in December and
February– Expansion of eligible assets– Reduction of minimum reserve ratio 2% => 1%
Preliminary estimates suggest that measures have been effective
15.3.2012 Erkki Liikanen 27
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
Refinancing operations by maturity
15.3.2012 Erkki Liikanen
-1 200
-1 000
-800
-600
-400
-200
0
200
400
600
800
1 000
1 200
2007 2008 2009 2010 2011 2012
Longer-term refinancing operations (3 mth)Supplementary longer-term refinancing operations (1-12 mth)Main refinancing operations (1 week)Net recourse to the standing facilities (overnight)Fine-tuning operations (1-7 days)Supplementary longer-term refinancing operations (36 mth)
Monetary policy operations
EUR bn
Source: Bank of Finland.
28
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
Bank of Finland’s claims relating to payment systems
15.3.2012 Erkki Liikanen
-20
-10
0
10
20
30
40
50
60
70
80
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Bank of Finland claims related to Target and correspondent accounts (net)
Use of deposit facility and fixed-term deposits of banks operating in Finland
Lending to banks operating in Finland related to monetary policy operations
Source: Bank of Finland.
EUR billions
29
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
Operation has eased interbank market tensions
Banking risk indicators Money market indicators
15.3.2012 Erkki Liikanen
-0,5
0,0
0,5
1,0
1,5
2,0
2,5
2008 2009 2010 2011 2012
1 month 3 month 12 month
Source: Bloomberg.
Percentage points
1, 3 ja 12 kuukauden euribor- ja repokorkojen välinen erotus
0
80
160
240
320
400
0
20
40
60
80
100
2008 2009 2010 2011 2012
VSTOXX index (LHS) iTraxx Europe Finance (RHS)
Source: Bloomberg.25902@Pankkiriski (en)
Otsikko
30
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
Sovereign risk premia have also decreased
10-year Italian government bonds10-year Spanish government
bonds
15.3.2012 Erkki Liikanen
2
3
4
5
6
7
8
1999 2001 2003 2005 2007 2009 2011
Italy average
%
Source: Bloomberg.25200@Italia 10v (en)
Italian 10v. korkotuotto
2
3
4
5
6
7
8
1999 2001 2003 2005 2007 2009 2011
Spain average
%
Source: Bloomberg.25200@Espanja 10v (en)
Espanjan 10v. korkotuotto
31
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
Conclusion
Central bank measures can calm the markets– Recent measures have ensured bank liquidity– Operating environment continues to be challenging
Permanent resolution requires government action– Countries need to take advantage of the window for
opportunities– Public finances need to be put back on a sustainable
footing– Measures to strengthen growth potential are necessary
Efficiency of crisis management is assessed ex post– Timely exit strategies important part of overall action
15.3.2012 Erkki Liikanen 32
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
Bank of Finland Bulletin 1/2012 contents
Main article: Monetary policy and the global economy– Cyclical situation and risks– Monetary and fiscal policy– Structural policy and macroeconomic imbalances
Additional articles:– Monetary policy transmission and debt in the euro area– Euro area economic policy coordination: what has been
done, and why? – Quantitative easing in monetary policy
15.3.2012 Erkki Liikanen 33