ECB's monetary policy

Bank of Finland

ECB’s monetary policyThe condition of the banks and key unresolved issues in the global economy

Press conference 21 March 2016

121.3.2016

Erkki Liikanen

Suomen Pankki – Finlands Bank – Bank of Finland

Monetary policy was eased on 10 March 2016 with the adoption of a comprehensive monetary policy package.

21.3.2016 Erkki Liikanen 2


Objectives of the March monetary policy decisions:

To further ease financing conditions in euro area countries

To foster increased lending

BACKGROUND:

Weakened outlook for global economy Tightening of financing conditions in early year Subdued inflation outlook



Inflation outlook weakened and expectations subdued



Still weak consumer price inflation


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1999 2004 2009 2014

Inflation Underlying inflation*%

* Underlying inflation = inflation excluding energy, food, alcohol and tobacco. Sources: ECB and Bank of Finland.

Euro area consumer price inflation (HICP)


Oil price strongly depressing short-term inflation expectations

Erkki Liikanen 621.3.2016

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-0.5

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1-year inflation-linked swap rate5-year inflation rate 5 years ahead10-year inflation-linked swap rateOil price (Brent) (right-hand scale)

% USD/barrel

Sources: Bloomberg, Macrobond and calculations by the Bank of Finland.

22/10 3/12


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2.5

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3.5

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2009 2010 2011 2012 2013 2014 2015 2016

Market expectations, euro area Market expectations, USA

SPF survey, euro area SPF survey, USA

%

Sources: Bloomberg, ECB, Fed of Philadelphia and Marcobond.Market expectations are based on 5-year and 10-year inflation-linked swap rates. The SPF survey horizon extends five years ahead.

Long-term inflation expectations have weakened again in euro area and USA



What monetary policy decisions were taken on 10 March?



Governing Council decisions in March 2016

Monetary policy rates were lowered– Key interest rate (MRO) to 0.0% (change -5 bp)– Deposit facility rate to -0.40% (-10 bp)

Monthly purchase volumes in the extended asset purchase programme (EAPP) were expanded (by €20 bn) to €80 bn as of 1 April 2016– Investment-grade bonds issued by non-banking-sector corporations

were included on list of assets eligible for purchase A second series of targeted longer-term refinancing

operations (TLTRO 2) will be launched in June 2016.– These will enhance the transmission of monetary policy measures

to the economy by encouraging banks to increase lending to the real economy.

– Each operation will have a 4-year maturity, and the interest rate can be as low as the rate on the deposit facility.



Forward guidance on monetary policy

Purchases are intended to run until at least the end of March 2017, or beyond, if necessary, until inflation is on a sustained path towards a level below, but close to, 2%.

In view of the current outlook for price stability, the Governing Council expects the key ECB interest rates to remain at present or lower levels for an extended period of time, and well beyond the horizon of the asset purchases.



Transmission of monetary policy:

The historically accommodative stance of monetary policy supports economic recovery and price stability through several transmission channels.



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2008 2009 2010 2011 2012 2013 2014 2015 2016

Germany Euro area average sovereign bond yield

%

10-year sovereign bond yield.Source: Macrobond.

Euro area sovereign bond yields at low levels



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2003 2006 2009 2012 2015

3-month EuriborAverage interest rate on new corporate loansAverage interest rate on new household loans

%

Sources: ECB and Macrobond.

Bank lending rates on household and corporate loans have decreased



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-3

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3

2010 2011 2012 2013 2014 2015 2016

Corporate loan stock Household loan stock

% change from previous year

Loan stocks adjusted for balance sheet transfers and securitisation.Sources: ECB and Macrobond.

Annual growth in loan stocks

Growth in bank loans has accelerated


Bank of Finland

Condition of the banks

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Erkki Liikanen

21.3.2016


Evolution of large banks’ share prices at the beginning of the year

21.3.2016 16Erkki Liikanen

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110

1.1.2016 1.2.2016 1.3.2016

Japan United States Europe Nordic countries

Index, 2016 = 100

Source: Bloomberg.


Euro area banks increased their capital


13.5 13.114.3

15.5 15.616.2

13.7 13.1

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2010 2011 2012 2013 2014 2015Q3

%

Source: European Central Bank.

Total capital adequacy ratio Tier 1 ratioCommon Equity Tier 1 ratio


Banks’ financial results improved since the crisis(Return on equity, ROE)

Erkki Liikanen 18

4.3

7.1

-30

-25

-20

-15

-10

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2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

%

*Reunamaat = CY, ES, GR, IE, IT ja SI.**Ydinmaat = AT, BE, DE, FI, FR ja NL.2015 käsittää ne pankit, jotka ovat raportoineet vuoden 2015 lopun tulinpäätöksen 16.3.2016 mennessä.Lähde: Snl.

Reunamaat* - mediaani Reunamaat - painottamaton keskiarvoYdinmaat -mediaani** Ydinmaat - painottamaton keskiarvo

21.3.2016

*Non-core countries = CY, ES, GR, IE, IT and SI.**Core-countries = AT, BE, DE, FI, FR and NL.*** 2015 covers all banks that have reported year-end financial statement by 16 March 2016Source: Snl.

***

Non-core countries, median *Non-core countries, unweighted average *Core-countries, median**Core-countries, unweighted average **


The differential between bank lending and deposit rates has decreased



Non-performing loans weigh on banks

The problem of non-performing loans particularly affects mid-sized banks in countries hit by the crisis.

The amount of non-performing loans has decreased in some countries, but progress is uneven and takes time.

A swift reduction in non-performing loans is essential for banks’ ability to grant new loans.



Tax-payers’ or creditors’ responsibility?

The crisis resolution framework that entered into force at the beginning of the year emphasises creditor involvement in situations where a bank runs into trouble.

Functions critical to society can be preserved and problems dealt with in an orderly manner.

The transition to the new resolution framework will not be easy, but it is important to complete it.


Bank of Finland

Structural change in China’s economy

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Erkki Liikanen

21.3.2016


Will China’s economic growth slow down?

Growth has been slowing and the transition towards a different growth model been ongoing for years already.

Policy has facilitated this change in China’s growth model in a number of ways, including easing of the monetary policy stance.

Capital movements have also been liberalized, including direct foreign investment by Chinese investors.



Growth slowdown and transition towards a different growth model have been ongoing for several years already


02468

101214161820

2008 2009 2010 2011 2012 2013 2014 2015

GDP Industrial output Retail salesReal annual change, %

Source: Macrobond.


Volume of China’s commodities imports not decreased much


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180

2009 2010 2011 2012 2013 2014 2015 2016

Crude oil Iron ore Copper Pulp

Index 2009 = 100, 3-month moving average

Source: Macrobond.

China's commodities import volume


Bank of Finland’s economists’ forecast on China


-4

-2

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2008 2010 2012 2014 2016 2018

Net exports Investment Consumption GDP

Sources: NBSC and BOFIT

% Forecast


China’s exchange rate appreciated significantly over past decade


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1280

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2005 2007 2009 2011 2013 2015

Real trade-weighted exchangerateEUR/CNY (rhs)

USD/CNY (rhs)

Index 2010 = 100 EUR/CNY and USD/CNY

Sources: BIS, Bloomberg.

Bank of Finland

Climate change and the financial sector

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Erkki Liikanen

21.3.2016


Paris climate agreement is crucial

“This is a historic moment, not just for us and our world today, but for our children, our grandchildren and future generations. The Paris Agreement is a turning point in the world’s fight against unmanaged climate change…”

Nicholas Stern’s comments on the Paris climate agreement (press release dated 12 December 2015).



What are the financial implications of climate change?

Climate change is a global problem with significant costs– Climate policy implies sharing costs temporally and

geographically

It affects economic growth, inflation and financial stability and adds to uncertainty– Implications for growth and financial stability

are assessed to be mainly negative, also over the short term

Analysing the implications for financial stability is crucial.



How does climate change affect financial stability?

The increasing frequency and amplitude of extreme weather events leads to an increase in financial losses– The value of banks’ investment portfolios and

debtors’ debt servicing ability decrease; insurance companies reimburse damages covered by insurance policies.

Restrictions of emissions create uncertainty regarding the business continuity of companies generating significant emissions in their business– The risk concerns a significant share of globally

traded securities, and banks have been lending to these companies.



Why is determination and rapid progress important in climate policy?

Climate change is taking place now and cannot be stopped immediately– Decisions taken and investments made will have an

impact for decades ahead.– Emissions remain in the atmosphere for decades.

Determined and consistent climate policy will minimise adverse effects – also for financial stability.

It is better to take the right decisions now than to wait.– Principle of prudence– No unnecessary limits to alternatives– Precarious to trust on salvation by innovation


Bank of Finland

Bank of Finland financial statements and result

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Erkki Liikanen

21.3.2016


Central bank result discloses prevailing monetary policy

The central bank's primary task is to take measures to ensure price stability in the euro area. The profit of the central bank is generated as a result of these operations.

The Bank of Finland operates efficiently and aims to ensure distribution of profit to the State.

The Bank of Finland's income consists of interest income on banknotes and monetary policy items as well as investment income on foreign reserves and other financial assets of the Bank.

The accommodative monetary policy shows in the Bank's balance sheet and profit and loss account. Interest income has decreased due to the low interest rates.


Suomen Pankki – Finlands Bank – Bank of Finland 35

Total risks (excl. gold) in relation to balance sheet risk buffers 31 Dec 2015

21.3.2016 Erkki Liikanen


Bank of Finland profit and distribution of profit to the State 2000–2015


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163177

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410 401420

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150 146129

9981.5 88.4

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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Profit for the financial year Distribution to the State

EUR million

Suomen Pankki – Finlands Bank – Bank of Finland21.3.2016 37

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Changes in headcount, 1970-2015Bank of Finland Financial Supervisory Authority

Erkki Liikanen


Thank you!


Economy & Finance

ECB's monetary policy