[PPT] - Monetary policy and its effectiveness 1 10.9.2015 1. Commitment PowerPoint Presentation

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Bank of Finland

Monetary policy and its effectiveness

1 10.9.2015

Governor Erkki Liikanen

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Suomen Pankki – Finlands Bank – Bank of Finland

1. Commitment to accommodative monetary

policy benefits economic outlook

10.9.2015 Governor Erkki Liikanen 2

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Suomen Pankki – Finlands Bank – Bank of Finland

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 2016.

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Suomen Pankki – Finlands Bank – Bank of Finland

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

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Suomen Pankki – Finlands Bank – Bank of Finland

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,
r 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.

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Suomen Pankki – Finlands Bank – Bank of Finland

2. Large scale asset purchases

stimulate both demand and inflation

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Suomen Pankki – Finlands Bank – Bank of Finland

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

nly a comparatively narrow range of high-quality

securities is purchased.

–

Investors are encouraged to shift holdings into other asset classes.

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Suomen Pankki – Finlands Bank – Bank of Finland

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

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Suomen Pankki – Finlands Bank – Bank of Finland

Divergence in monetary policy cycles has weakened the euro

0.6 0.8 1 1.2 1.4 1.6 1.8 1999 2001 2003 2005 2007 2009 2011 2013 2015 EUR/USD Source: Macrobond.

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Suomen Pankki – Finlands Bank – Bank of Finland

Renewed decline in oil price puts downward pressure on inflation

20 40 60 80 100 120 140 160 20 40 60 80 100 120 140 160 2008 2010 2012 2014 Price of crude oil, Northern Sea Brent, USD/barrel (left-hand scale) Industrial commodities excl. energy, USD (right-hand scale) USD/barrel Index 2010 = 100 Sources: Bloomberg, HWWA and Bank of Finland.

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Suomen Pankki – Finlands Bank – Bank of Finland

Commitment to accommodative monetary policy stance supports inflation expectations

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0.5

0.5 1 1.5 2 2.5 3 3.5 2007 2008 2009 2010 2011 2012 2013 2014 2015 2 year inflation swap 5 year inflation swap 10 year inflation swap % Source: Bloomberg.

Announcement of the EAPP 22 January 2015

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Suomen Pankki – Finlands Bank – Bank of Finland

Sharp fall in long-term bond yields over the past year, some reversal recently

1 2 3 4 5 6 2008 2009 2010 2011 2012 2013 2014 2015 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.

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Suomen Pankki – Finlands Bank – Bank of Finland

Stock market turbulence in August

50 100 150 200 250 300 350 400 450 500 20 40 60 80 100 120 140 160 2007 2008 2009 2010 2011 2012 2013 2014 2015

United States: S&P 500 Euro area: DJ Euro Stoxx (broad) Japan: Nikkei China: Shanghai a share (right-hand scale)

4.1.2000 = 100 Source: Bloomberg.

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Suomen Pankki – Finlands Bank – Bank of Finland

3. Monetary policy transmission to the

real economy is improving

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Suomen Pankki – Finlands Bank – Bank of Finland

Monetary policy measures support bank lending

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4
3
2
1

1 2 3 4 2010 2011 2012 2013 2014 2015

Non-financial corporations Households

annual growth rate, % Source: European Central Bank Loans adjusted for sales and securitisation

Loan growth in euro area

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Suomen Pankki – Finlands Bank – Bank of Finland

Monetary policy transmission to non- financial corporations improved, but still uneven

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1 2 3 4 5 6 7 2005 2007 2009 2011 2013 2015 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.

New corporate loan agreements, average interest

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Suomen Pankki – Finlands Bank – Bank of Finland

Corporate bond yields remain low, some reversal recently

1 2 3 4 5 6 7 8 9 10 2003 2008 2013 3-year AAA-grade 5-year AAA-grade 3-year BBB-grade 5-year BBB-grade % Source: Macrobond.

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Suomen Pankki – Finlands Bank – Bank of Finland

Average interest rates on new housing loans have declined

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1 2 3 4 5 6 7 2005 2007 2009 2011 2013 2015

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.

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Suomen Pankki – Finlands Bank – Bank of Finland

4. The recovery in the euro area is

expected to continue

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Suomen Pankki – Finlands Bank – Bank of Finland

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%)

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Suomen Pankki – Finlands Bank – Bank of Finland

Inflation outlook subdued in 2015-16

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1

1 2 3 4 5 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 HICP inflation Core price inflation ECB forecast September 2015 % Sources: Macrobond and ECB.

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Suomen Pankki – Finlands Bank – Bank of Finland

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

2015.

Euro area recovery bolsters exports, Russia weakens.
Temporary factors have had a relatively large negative

impact on trade figures in 2015Q2.

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Suomen Pankki – Finlands Bank – Bank of Finland

4. Financial stability and

macroprudential policy

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Suomen Pankki – Finlands Bank – Bank of Finland

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.

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Suomen Pankki – Finlands Bank – Bank of Finland 10.9.2015 Governor Erkki Liikanen 25

The ECB’s role in the new supervisory architecture

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

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Suomen Pankki – Finlands Bank – Bank of Finland

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.

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Suomen Pankki – Finlands Bank – Bank of Finland

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.

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Suomen Pankki – Finlands Bank – Bank of Finland

5. Transparency improves the accountability

and effectiveness of monetary policy

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Suomen Pankki – Finlands Bank – Bank of Finland

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

paque 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.

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Transparency, accountability and efficiency: accounts of the monetary policy meetings

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Suomen Pankki – Finlands Bank – Bank of Finland

Thank you!

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