Governor Erkki Liikanen Bank of Finland. Monetary policy and its effectiveness

Transcription

1 Governor Erkki Liikanen Bank of Finland Monetary policy and its effectiveness

2 1. Commitment to accommodative monetary policy benefits economic outlook 2

3 Interest rate policy in 2014 Central bank interest rates reduced to the zero lower bound Interest rate on main refinancing operations 0.05% (September 2014) Interest rate on the deposit facility -0.20% (September 2014) The full allotment policy safeguarding banks access to central bank refinancing will be continued at least until the end of

4 The decisions to support provision of credit in 2014 Banks have access to longer-term central bank refinancing (maturing in 2018) at a fixed rate of 0.05% for provision of credit to the real economy (excl. housing). Third purchase programme for covered bonds issued by banks (CBPP3) Since October 2014, purchases conducted to the value of EUR 111 billion Asset-backed securities purchase programme (ABSPP) Since November 2014, purchases conducted to the value of EUR 11 billion 4

5 The decisions on large scale asset purchases and forward guidance in January 2015 Expanded asset purchase programme Bonds issued by euro area governments, government agencies and European institutions as a new target for purchases Combined monthly asset purchases under the three programmes of EUR 60 billion from March 2015 until at least September 2016 (totalling EUR 1,140 billion) The Bank of Finland will primarily buy Finnish government bonds (itself carrying the credit risk involved) and bonds issued by European institutions (for which the credit risk will be shared amongst Eurosystem central banks). Forward guidance Purchases are intended to run until the end of September 2016, or beyond, if necessary, and, in any case, until we see a sustained adjustment in the path of inflation consistent with our aim of achieving inflation rates below, but close to, 2% over the medium term. 5

6 2. Large scale asset purchases stimulate both demand and inflation 6

7 Signalling and portfolio balance effects of a large-scale asset purchase programme The signalling effect contributes to re-anchoring inflation expectations more in line with the medium-term objective. The portfolio balance effect extends the effects across the whole financial system even though only a comparatively narrow range of high-quality securities is purchased. Investors are encouraged to shift holdings into other asset classes. 7

8 ECB s accommodative monetary policy Lowers real interest rates and eases financing conditions in the economy interest rates at the longer end decline, financing conditions for companies and households become easier, asset prices rise higher inflation expectations mean lower real interest rates Increases demand and boosts inflation external value of the euro depreciates consumption and the profitability of investments increase corporate and household confidence improves 8

9 Divergence in monetary policy cycles has weakened the euro 1.8 EUR/USD Source: Macrobond. 9

10 Renewed decline in oil price puts downward pressure on inflation Price of crude oil, Northern Sea Brent, USD/barrel (left-hand scale) Industrial commodities excl. energy, USD (right-hand scale) USD/barrel Index 2010 = Sources: Bloomberg, HWWA and Bank of Finland

11 Commitment to accommodative monetary policy stance supports inflation expectations % 2 year inflation swap 5 year inflation swap 10 year inflation swap Announcement of the EAPP 22 January Source: Bloomberg. 11

12 Sharp fall in long-term bond yields over the past year, some reversal recently 6 % Germany Average yield on euro area government bonds (excl. Greece) *Weighted average of euro area countries 10-year government bonds (excl. Greece). Sources: Bloomberg and calculations by the Bank of Finland. 12

13 Stock market turbulence in August = 100 United States: S&P 500 Euro area: DJ Euro Stoxx (broad) Japan: Nikkei China: Shanghai a share (right-hand scale) Source: Bloomberg

14 3. Monetary policy transmission to the real economy is improving 14

15 Monetary policy measures support bank lending Loan growth in euro area Non-financial corporations Households 4 annual growth rate, % Source: European Central Bank Loans adjusted for sales and securitisation 15

16 Monetary policy transmission to nonfinancial corporations improved, but still uneven 7 % New corporate loan agreements, average interest Highly rated countries* GIIPS** Interest on the main refinancing operations Source: European Central Bank. * Germany, France, Netherlands, Belgium, Austria and Finland. ** Greece, Ireland, Italy, Portugal and Spain. 16

17 Corporate bond yields remain low, some reversal recently year AAA-grade 5-year AAA-grade % 3-year BBB-grade 5-year BBB-grade Source: Macrobond. 17

18 Average interest rates on new housing loans have declined 7 New mortgage loan agreements, average interest % Highly rated countries* GIIPS** Interest on the main refinancing operations Source: European Central Bank. * Germany, France, Netherlands, Belgium, Austria and Finland. ** Greece, Ireland, Italy, Portugal, and Spain. 18

19 4. The recovery in the euro area is expected to continue 19

20 ECB staff projections in September (difference to Eurosystem staff June 2015 projections) GDP: 2015: 1.4% (-0.1) 2016: 1.7% (-0.2) 2017: 1.8% (-0.2) Inflation: 2015: 0.1% (-0.2%) 2016: 1.1% (-0.4%) 2017: 1.7% (-0.1%) 20

21 Inflation outlook subdued in HICP inflation Core price inflation 5 % ECB forecast September Sources: Macrobond and ECB. 21

22 Finland falls further behind euro area growth Latest Quarterly National Account release suggests moderate growth outlook continues. Finland is not expected to reach the pace of euro area recovery during the forecast period. The labour market situation has deteriorated since June Euro area recovery bolsters exports, Russia weakens. Temporary factors have had a relatively large negative impact on trade figures in 2015Q Governor Erkki Liikanen Suomen Pankki Finlands Bank Bank of Finland 22

23 4. Financial stability and macroprudential policy 23

24 The mandate of the ECB Maintaining price stability will remain the primary objective of the ECB. Without prejudice to price stability, the ECB will support the general economic policies in the EU, including balanced economic growth. Financial stability is key to realizing this mandate. The SSM regulation assigns macroprudential responsibilities to the ECB with power to apply tighter macroprudential requirements than the designated national macroprudential authorities. 24

25 The ECB s role in the new supervisory architecture European Central Bank (ECB) ECB/SSM Financial and economic stability Governing Council Monetary Policy: Price Stability Macro-prudential Policy: Financial stability European Systemic Risk Board (ESRB) Supervision of financial institutions Bank Supervision: Solvency and resilience of individual banks European Supervisory Authorities (EBA, ESMA, EIOPA) Euro area EU Sources: Smets (2013) and Bank of Finland. 25

26 The ECB reinforces but cannot substitute national macroprudential policies National macroprudential authorities bear the main responsibility in detecting systemic risks and taking appropriate macroprudential action. National macroprudential action should be timely, bold and intrusive. The ECB can reduce the inaction bias inherent in national macroprudential policies. 26

27 Macroprudential policy is important in a time of exceptionally accommodative monetary policy Negative side-effects of accommodative monetary policy cannot be entirely ruled out: a prolonged low level of interest rates and the additional relaxation brought by securities purchases could inflate the risks to financial stability; the euro area must maintain readiness to actively deploy macroprudential policy tools if required; every Member State must have an effective macroprudential toolbox. 27

28 5. Transparency improves the accountability and effectiveness of monetary policy 28

29 Transparency, accountability and efficiency: accounts of the monetary policy meetings Transparency is an important tool for an independent central bank like the ECB The days of never excuse, never explain and central banks acting as opaque and secretive institutions are over. Transparency facilitates accountability and efficiency The ECB is accountable to achieve its mandate, price stability. Conveying the Governing Council s reaction function facilitates efficiency and makes it is easier to attain monetary policy objectives. The accounts convey a balanced account of discussions in the Governing Council They provide a fair and balanced summary of the main arguments. The language reflects the collegiate, consensus-oriented mode of discussion and decision-making Governor Erkki Liikanen Suomen Pankki Finlands Bank Bank of Finland 29

30 Thank you! 30