Bank of Finland Bulletin 1/2012 Monetary Policy and the Global Economy

Transcription

1 Bank of Finland Bulletin 1/2012 Monetary Policy and the Global Economy Governor Erkki Liikanen 15 March Erkki Liikanen SUOMEN PANKKI FINLANDS BANK BANK OF FINLAND 1

2 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 Erkki Liikanen SUOMEN PANKKI FINLANDS BANK BANK OF FINLAND 2

3 Market developments and cyclical indicators Erkki Liikanen SUOMEN PANKKI FINLANDS BANK BANK OF FINLAND 3

4 Major changes in confidence Purchase Managers' Indices: manufacturing USA Euro area Japan China Brazil 65 Balance Source: Bloomberg. (enet) Erkki Liikanen SUOMEN PANKKI FINLANDS BANK BANK OF FINLAND 4

5 Major changes in confidence Consumer confidence indicator USA Japan Euro area (RHS) 100 Balance Balance Sources: European Commission and Bloomberg @Chart87 (enet) Erkki Liikanen SUOMEN PANKKI FINLANDS BANK BANK OF FINLAND 5

6 This is also reflected on the stock markets Europe (DJ Euro Stoxx wide) USA (S&P 500) Japan (Nikkei 225) 110 Index, = Source: Bloomberg Erkki Liikanen SUOMEN PANKKI FINLANDS BANK BANK OF FINLAND 6

7 Some improvement on the government bond markets year government bond yield, % Ireland Portugal Italy Spain Finland Germany Source: Reuters Erkki Liikanen SUOMEN PANKKI FINLANDS BANK BANK OF FINLAND 7

8 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 Erkki Liikanen SUOMEN PANKKI FINLANDS BANK BANK OF FINLAND 8

9 Cut in policy rate and expansion in central bank credit have relaxed monetary conditions in the euro area 6 % ECB Main Refinancing Rate Interbank overnight rate Eonia 5 ECB liquidity facility rate ECB overnight deposit facility rate Sources: ECB and Reuters @Chart27 (en) Erkki Liikanen SUOMEN PANKKI FINLANDS BANK BANK OF FINLAND 9

10 Country specific differences in financial conditions are still large Euro area Finland Non-financial corporations Households Euro area Finland 16 % 16 MFI loans to private sector, y/y, % Source: ECB. Sources: European Central Bank and Bank of Finland @Chart48 (en) Erkki Liikanen SUOMEN PANKKI FINLANDS BANK BANK OF FINLAND 10

11 European crisis management framework Lisbon Treaty Broad guidelines for economic policy Avoidance of excessive deficits Special rules for euro area countries Six-Pack Coordination of Economic Policies Amendments related to: Sanctions in Stability and Growth Pact Correction of macroeconomic imbalances Sanctions for macroeconomic imbalances Excessive Deficit Procedure (EDP) Amendments related to: Sanctions in Stability and Growth Pact Fiscal framework Two-Pack Budgetary surveillance: Euro area countries EDP countries Countries with serious risk of financial instability Fiscal Compact Treaty on strengthening of economic policies Medium-term objective for structural budget deficit -1/2 % of GDP (main rule, -1% in exceptional cases) Automatic correction mechanism incorporated in national legislations Assessing excessiveness of deficits As the main rule, contracting parties support Commission proposals Erkki Liikanen SUOMEN PANKKI FINLANDS BANK BANK OF FINLAND 11

12 Bank of Finland s global economy forecast Erkki Liikanen SUOMEN PANKKI FINLANDS BANK BANK OF FINLAND 12

13 Assumptions for Bank of Finland s international forecast 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 SUOMEN PANKKI FINLANDS BANK BANK OF FINLAND 13

14 Bank of Finland s forecast outcomes GDP f 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, (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 SUOMEN PANKKI FINLANDS BANK BANK OF FINLAND 14

15 Inflation slows during the current year Inflation Inflation expectations 10 USA Euro area Japan China Brazil Finland % change from previous year 4 Market expectations, euro area SPF-survey, euro area % Market expectations, United States SPF-survey, United States 8 3, , Source: National statistical authorities @Kuluttajahinnat (enet) 1, Inflation expectations based on 5-year inflaation swaps. 3- day moving averages. SPF-survey 5 years ahead. Sources: Bloomberg, ECB, Fed of Philadelphia and Bankof Finland calculations @ET (en) Erkki Liikanen SUOMEN PANKKI FINLANDS BANK BANK OF FINLAND 15

16 Why is this crisis different: slow recovery from financial crises GDP Recessions excl. financial crises Recessions related to financial crises USA 2008 Euro area 2008 Finland Horizontal axis: time since peak in quarters. Vertical axis: median of observations, index: peak = Sources: IMF WEO April 2009, Eurostat, BEA, and Statistics Finland Erkki Liikanen SUOMEN PANKKI FINLANDS BANK BANK OF FINLAND 16

17 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 Erkki Liikanen SUOMEN PANKKI FINLANDS BANK BANK OF FINLAND 17

18 Major internal differences in the euro area Erkki Liikanen SUOMEN PANKKI FINLANDS BANK BANK OF FINLAND 18

19 Faster inflation than elsewhere and the resultant low level of real interest rates led to over-indebtedness in GIPS countries 125 other EA countries Ireland Greece Spain Portugal Euro area Germany Index,1999 = Source: Eurostat Developments in euro area countries consumer prices vis-à-vis Germany, Erkki Liikanen SUOMEN PANKKI FINLANDS BANK BANK OF FINLAND 19

20 Fiscal policy faces important challenges Projected Deficit Objectives of Stability and Convergence Programmes* 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 Erkki Liikanen SUOMEN PANKKI FINLANDS BANK BANK OF FINLAND 20

21 Italy, Spain and France implementing strongest adjustments Euro area Fiscal Consolidation - Country Breakdown Euro area Fiscal Consolidation - Country Breakdown Other euro area countries 11 % Netherlands 10 % Spain 34 % Other euro area countries 21 % Spain 16 % Italy 28 % France 17 % Sources: IMF, European Commission, announcements by countries and Bank of Finland calculations. Italy 28 % France 35 % Sources: IMF, European Commission, announcements by countries and Bank of Finland calculations Erkki Liikanen SUOMEN PANKKI FINLANDS BANK BANK OF FINLAND 21

22 Italy, Spain and France implementing strongest adjustments Euro area Fiscal Consolidation - Country Breakdown Euro area Fiscal Consolidation - Country Breakdown Other euro area countries 13 % Spain 29 % Other euro area countries 19 % Spain 25 % Netherlands 10 % Italy 30 % France 18 % Italy 25 % France31 % Sources: IMF, European Commission, announcements by countries and Bank of Finland calculations. Sources: IMF, European Commission, announcements by countries and Bank of Finland calculations Erkki Liikanen SUOMEN PANKKI FINLANDS BANK BANK OF FINLAND 22

23 Large differences in youth unemployment by country % Youth All Spain Portugal Ireland Italy Sweden Finland Germany Euro area Source: Eurostat Erkki Liikanen SUOMEN PANKKI FINLANDS BANK BANK OF FINLAND 23

24 Financial crisis affected different areas in different countries 6 3 % change Change in number of jobs Share of construction sector Share of industry 0-3 Ireland Spain Finland Italy France Germany Change calculated between post 2005 employment peak and employment situation in 2011/Q3. Source: Eurostat Erkki Liikanen SUOMEN PANKKI FINLANDS BANK BANK OF FINLAND 24

25 Recent monetary policy measures Erkki Liikanen SUOMEN PANKKI FINLANDS BANK BANK OF FINLAND 25

26 Monetary policy globally accommodative Central bank interest rates % USA: fed funds target rate Japan: over night rate Euro system: main refinancing rate* UK: repo rate Sweden: repo rate Central bank balance sheets 5 FED BOJ ECB BOE Riksbank % of GDP * To 15 Oct 2008, minimum bid rate Source: Bloomberg @Keskuspankkikorkoja (en Sources: National statistical authorities, Eurostat ja Bloomberg @KP_taseet (enet) Erkki Liikanen SUOMEN PANKKI FINLANDS BANK BANK OF FINLAND 26

27 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 Erkki Liikanen SUOMEN PANKKI FINLANDS BANK BANK OF FINLAND 27

28 Refinancing operations by maturity EUR bn 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) Source: Bank of Finland Erkki Liikanen SUOMEN PANKKI FINLANDS BANK BANK OF FINLAND 28

29 Bank of Finland s claims relating to payment systems 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 80 EUR billions Source: Bank of Finland Erkki Liikanen SUOMEN PANKKI FINLANDS BANK BANK OF FINLAND 29

30 Operation has eased interbank market tensions Banking risk indicators Money market indicators 100 VSTOXX index (LHS) itraxx Europe Finance (RHS) 400 2,5 1 month 3 month 12 month Percentage points , ,5 1, , , Source: Bloomberg @Pankkiriski (en) 0-0, Source: Bloomberg Erkki Liikanen SUOMEN PANKKI FINLANDS BANK BANK OF FINLAND 30

31 Sovereign risk premia have also decreased 10-year Italian government bonds 10-year Spanish government bonds Italy average Spain average 8 % 8 % Source: Bloomberg. Source: Bloomberg @Italia 10v (en) 25200@Espanja 10v (en) Erkki Liikanen SUOMEN PANKKI FINLANDS BANK BANK OF FINLAND 31

32 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 Erkki Liikanen SUOMEN PANKKI FINLANDS BANK BANK OF FINLAND 32

33 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 Erkki Liikanen SUOMEN PANKKI FINLANDS BANK BANK OF FINLAND 33