Bank of Finland Bulletin 1/2012 Monetary Policy and the Global Economy Governor Erkki Liikanen 15 March 2012 15.3.2012 Erkki Liikanen SUOMEN PANKKI FINLANDS BANK BANK OF FINLAND 1
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 SUOMEN PANKKI FINLANDS BANK BANK OF FINLAND 2
Market developments and cyclical indicators 15.3.2012 Erkki Liikanen SUOMEN PANKKI FINLANDS BANK BANK OF FINLAND 3
Major changes in confidence Purchase Managers' Indices: manufacturing USA Euro area Japan China Brazil 65 Balance 60 55 50 45 40 35 30 25 2007 2008 2009 2010 2011 2012 Source: Bloomberg. 25200@PMI_teollisuus (enet) 15.3.2012 Erkki Liikanen SUOMEN PANKKI FINLANDS BANK BANK OF FINLAND 4
Major changes in confidence Consumer confidence indicator USA Japan Euro area (RHS) 100 Balance Balance 0 90-5 80-10 70-15 60-20 50-25 40-30 30-35 20 2007 2008 2009 2010 2011 2012 Sources: European Commission and Bloomberg. 25200@Chart87 (enet) -40 15.3.2012 Erkki Liikanen SUOMEN PANKKI FINLANDS BANK BANK OF FINLAND 5
This is also reflected on the stock markets Europe (DJ Euro Stoxx wide) USA (S&P 500) Japan (Nikkei 225) 110 Index, 4.1.2008=100 100 90 80 70 60 50 40 2008 2009 2010 2011 2012 Source: Bloomberg. 19002@stocks_main2_en 15.3.2012 Erkki Liikanen SUOMEN PANKKI FINLANDS BANK BANK OF FINLAND 6
Some improvement on the government bond markets 18 16 14 12 10 8 6 10 year government bond yield, % Ireland Portugal Italy 4 2 0 Spain Finland Germany 2008 2009 2010 2011 2012 Source: Reuters. 25874 15.3.2012 Erkki Liikanen SUOMEN PANKKI FINLANDS BANK BANK OF FINLAND 7
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 SUOMEN PANKKI FINLANDS BANK BANK OF FINLAND 8
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 4 3 2 1 0 ECB overnight deposit facility rate 2005 2006 2007 2008 2009 2010 2011 2012 Sources: ECB and Reuters. 25384@Chart27 (en) 15.3.2012 Erkki Liikanen SUOMEN PANKKI FINLANDS BANK BANK OF FINLAND 9
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, % 14 14 12 10 8 6 4 2 12 10 8 6 4 0 2-2 0-4 2005 2007 2009 2011-2 2007 2008 2009 2010 2011 2012 Source: ECB. Sources: European Central Bank and Bank of Finland. 25840@Chart48 (en) 25827 15.3.2012 Erkki Liikanen SUOMEN PANKKI FINLANDS BANK BANK OF FINLAND 10
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 15.3.2012 Erkki Liikanen SUOMEN PANKKI FINLANDS BANK BANK OF FINLAND 11
Bank of Finland s global economy forecast 15.3.2012 Erkki Liikanen SUOMEN PANKKI FINLANDS BANK BANK OF FINLAND 12
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 15.3.2012 Erkki Liikanen SUOMEN PANKKI FINLANDS BANK BANK OF FINLAND 13
Bank of Finland s forecast outcomes 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. 15.3.2012 Erkki Liikanen SUOMEN PANKKI FINLANDS BANK BANK OF FINLAND 14
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 3,5 6 4 3 2 2,5 0 2-2 -4 2007 2008 2009 2010 2011 2012 Source: National statistical authorities. 25200@Kuluttajahinnat (enet) 1,5 2007 2008 2009 2010 2011 2012 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. 25456@ET 2012-1 (en) 15.3.2012 Erkki Liikanen SUOMEN PANKKI FINLANDS BANK BANK OF FINLAND 15
Why is this crisis different: slow recovery from financial crises 106 104 102 100 98 96 GDP Recessions excl. financial crises Recessions related to financial crises USA 2008 Euro area 2008 Finland 2008 94 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Horizontal axis: time since peak in quarters. Vertical axis: median of observations, index: peak = 100. 25856 Sources: IMF WEO April 2009, Eurostat, BEA, and Statistics Finland. 15.3.2012 Erkki Liikanen SUOMEN PANKKI FINLANDS BANK BANK OF FINLAND 16
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 SUOMEN PANKKI FINLANDS BANK BANK OF FINLAND 17
Major internal differences in the euro area 15.3.2012 Erkki Liikanen SUOMEN PANKKI FINLANDS BANK BANK OF FINLAND 18
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 = 100 120 115 110 105 100 95 Source: Eurostat Developments in euro area countries consumer prices vis-à-vis Germany, 1999-2011. 25005 15.3.2012 Erkki Liikanen SUOMEN PANKKI FINLANDS BANK BANK OF FINLAND 19
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 SUOMEN PANKKI FINLANDS BANK BANK OF FINLAND 20
Italy, Spain and France implementing strongest adjustments 2012 2013 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. 15.3.2012 Erkki Liikanen SUOMEN PANKKI FINLANDS BANK BANK OF FINLAND 21
Italy, Spain and France implementing strongest adjustments 2012 2013 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. 15.3.2012 Erkki Liikanen SUOMEN PANKKI FINLANDS BANK BANK OF FINLAND 22
Large differences in youth unemployment by country 50 45 40 35 30 25 20 15 10 5 0 % Youth All 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 Source: Eurostat. 15.3.2012 Erkki Liikanen SUOMEN PANKKI FINLANDS BANK BANK OF FINLAND 23
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 -6-9 -12-15 -18 Change calculated between post 2005 employment peak and employment situation in 2011/Q3. Source: Eurostat 15.3.2012 Erkki Liikanen SUOMEN PANKKI FINLANDS BANK BANK OF FINLAND 24
Recent monetary policy measures 15.3.2012 Erkki Liikanen SUOMEN PANKKI FINLANDS BANK BANK OF FINLAND 25
Monetary policy globally accommodative 7 6 5 4 3 2 1 Central bank interest rates % USA: fed funds target rate Japan: over night rate Euro system: main refinancing rate* UK: repo rate Sweden: repo rate 35 30 25 20 15 10 Central bank balance sheets 5 FED BOJ ECB BOE Riksbank % of GDP 0 2003 2005 2007 2009 2011 * To 15 Oct 2008, minimum bid rate Source: Bloomberg. 25200@Keskuspankkikorkoja (en 0 2007 2008 2009 2010 2011 2012 Sources: National statistical authorities, Eurostat ja Bloomberg. 25200@KP_taseet (enet) 15.3.2012 Erkki Liikanen SUOMEN PANKKI FINLANDS BANK BANK OF FINLAND 26
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 SUOMEN PANKKI FINLANDS BANK BANK OF FINLAND 27
Refinancing operations by maturity 1 200 1 000 800 600 400 200 0-200 -400-600 -800-1 000-1 200 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) 2007 2008 2009 2010 2011 2012 Source: Bank of Finland. 15.3.2012 Erkki Liikanen SUOMEN PANKKI FINLANDS BANK BANK OF FINLAND 28
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 70 60 50 40 30 20 10 0-10 -20 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: Bank of Finland. 15.3.2012 Erkki Liikanen SUOMEN PANKKI FINLANDS BANK BANK OF FINLAND 29
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 80 320 2,0 60 240 1,5 1,0 40 160 0,5 20 80 0,0 0 2008 2009 2010 2011 2012 Source: Bloomberg. 25902@Pankkiriski (en) 0-0,5 2008 2009 2010 2011 2012 Source: Bloomberg. 15.3.2012 Erkki Liikanen SUOMEN PANKKI FINLANDS BANK BANK OF FINLAND 30
Sovereign risk premia have also decreased 10-year Italian government bonds 10-year Spanish government bonds Italy average Spain average 8 % 8 % 7 7 6 6 5 5 4 4 3 3 2 1999 2001 2003 2005 2007 2009 2011 2 1999 2001 2003 2005 2007 2009 2011 Source: Bloomberg. Source: Bloomberg. 25200@Italia 10v (en) 25200@Espanja 10v (en) 15.3.2012 Erkki Liikanen SUOMEN PANKKI FINLANDS BANK BANK OF FINLAND 31
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 SUOMEN PANKKI FINLANDS BANK BANK OF FINLAND 32
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 SUOMEN PANKKI FINLANDS BANK BANK OF FINLAND 33