Bank of Finland
Monetary Policy
Global Interdependence CenterCentral Banking Series: HelsinkiJune 6, 2016 at House of the Estates
16.6.2016
Governor Erkki Liikanen
Suomen Pankki – Finlands Bank – Bank of Finland
Growth and inflation outlook in the euro area
6.6.2016 Governor Erkki Liikanen 2
Suomen Pankki – Finlands Bank – Bank of Finland
United StatesGradual normalisation of monetary policy?
EuropeRisk of deflation?
Emerging economiesCondition of balance sheetsCommodity prices
ChinaSlowing of economic growth and structural change
Oil and other commoditiesPrice developments
The uncertainties are in part economic …
3Governor Erkki Liikanen6.6.2016
Suomen Pankki – Finlands Bank – Bank of Finland
EuropeBREXITRefugee situation
GlobalConsequences of climate change
Near EastGeopolitical risks
… but it is difficult to assess the economic importance of some risks
United States and EuropeOpposition to free tradeRisk of introversion
4Governor Erkki Liikanen6.6.2016
Suomen Pankki – Finlands Bank – Bank of Finland
GDP recovery broad-based in the euro area
6.6.2016 Governor Erkki Liikanen 5
0
2
4
6
8
-2
-1
0
1
2
3
4
2012 2013 2014 2015 2016 2017
Euro area USA Japan China, (right scale)% change from previous year
Sources: Eurostat, ECB and OECD.Euro area ECB BMPE June 2016 projection. USA, Japan, China OECD June 2016 forecast. 32709
Suomen Pankki – Finlands Bank – Bank of Finland
But consumer price inflation still subdued
6.6.2016 Governor Erkki Liikanen 6
-1
0
1
2
3
4
5
1999 2004 2009 2014
Inflation Underlying inflation*%
* Underlying inflation = inflation excluding energy, food, alcohol and tobacco. Sources: ECB and Bank of Finland.32120@Chart8(EN)
Euro area consumer price inflation (HICP)
Suomen Pankki – Finlands Bank – Bank of Finland
Long-term inflation expectations low in the euro area
Governor Erkki Liikanen 76.6.2016
1
1.5
2
2.5
3
3.5
4
2009 2010 2011 2012 2013 2014 2015 2016
Market expectations, euro area Market expectations, USASPF survey, euro area SPF survey, USA
%
Sources: Bloomberg, ECB, Philadelphia Fed and Macrobond.Market expectations are based on 5-year and 10-year inflation-linked swap rates. The SPF survey horizon extends five years ahead.patu32422@infoodotus(ENG)
Suomen Pankki – Finlands Bank – Bank of Finland
Growth and inflation forecasts: Eurosystem macroeconomic projections, June 2016
(change from March 2016 ECB staff macroeconomic projections)
GDP:2016: 1.6% (+0.2%)2017: 1.7% ( - )2018: 1.7% (-0.1%)
Inflation:2016: 0.2% (+0.1%)2017: 1.3% ( - )2018: 1.6% ( - )
6.6.2016 Governor Erkki Liikanen 8
Suomen Pankki – Finlands Bank – Bank of Finland
Monetary policy exceptionally accommodative for a prolonged period
6.6.2016 Governor Erkki Liikanen 9
Suomen Pankki – Finlands Bank – Bank of Finland
Eurosystem non-standard monetary policy
Outright Monetary Transactions (2012- )
Forward Guidance (2013- )
Targeted Long Term Refinancing Operations (2014-15 and 2016-17)
Covered Bond Purchase Programme (2014- ) Asset Backed Securities Purchase Programme
(2014- ) Public Sector Purchase Programme (2015-) Corporate Sector Purchase Programme (2016- )
6.6.2016 Governor Erkki Liikanen 10
Suomen Pankki – Finlands Bank – Bank of Finland
An important new step was taken 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
• Forward guidance
Purchases are intended to be carried out until end-September 2016 and will in any case be conducted until we see a sustained adjustment in the path of inflation consistent with our inflation aim.
11Governor Erkki Liikanen6.6.2016
Suomen Pankki – Finlands Bank – Bank of Finland
Monetary policy was further eased on 10 March 2016 with the adoption of a comprehensive monetary policy package.
6.6.2016 Governor Erkki Liikanen 12
Suomen Pankki – Finlands Bank – Bank of Finland
ECB Governing Council decisions in March 2016
Monetary policy rates were lowered– Key interest rate to 0.0%– Deposit facility rate to -0.40%
Monthly purchase volumes in the expanded asset purchase programme (EAPP) were expanded to €80 bn as of 1 April 2016– Investment-grade bonds issued by non-banking-sector
corporations included
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.
6.6.2016 Governor Erkki Liikanen 13
Suomen Pankki – Finlands Bank – Bank of Finland
Monthly purchase volumes increasedfrom EUR 60 billion to EUR 80 billion
6.6.2016 Governor Erkki Liikanen 14
0
200
400
600
800
1 000
1 200
1 400
1 600
1 800
2 000
2015 2016 2017
Asset-backed securities Covered bondsPublic sector debt securities
EUR billion
Sources: ECB and Macrobond.The dashed line shows target path announced in March, the dotted line shows the previous target path announced in December 2015.
patu32422@EAPP2(2)
Suomen Pankki – Finlands Bank – Bank of Finland
ECB Governing Council on 2 June 2016 confirmed its 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 past the horizon of the asset purchases.
6.6.2016 Governor Erkki Liikanen 15
Suomen Pankki – Finlands Bank – Bank of Finland
ECB Governing Council on 2 June 2016
In the current context, it is crucial to ensure that the very low inflation environment does not become entrenched in second-round effects on wage and price setting.
The Governing Council will closely monitor the evolution of the outlook for price stability and, if warranted to achieve its objective, will act by using all the instruments available within its mandate.
6.6.2016 Governor Erkki Liikanen 16
Suomen Pankki – Finlands Bank – Bank of Finland6.6.2016 Governor Erkki Liikanen 17
Monetary policy transmission channels
Suomen Pankki – Finlands Bank – Bank of Finland
.
.
.
Time
A cut in monetary policy rates lowers short‐term money market rates…
%Change in Eonia-futures after a cut in
monetary policy rates
Present
Expected short-term money market rate
18Governor Erkki Liikanen6.6.2016
Suomen Pankki – Finlands Bank – Bank of Finland
2019 …2017 2018 Time
… forward guidance postpones expectedtightening of monetary policy…
2016
%
Change in Eonia-futures due to forwardguidance
Expected short-term money market rate
19Governor Erkki Liikanen6.6.2016
Suomen Pankki – Finlands Bank – Bank of Finland
2019 …2017 2018 Time
… and asset purchases depress long‐term interest rates
2016
%
Decline in long-term ratedue to asset purchases
Expected short-term money market rate
20Governor Erkki Liikanen6.6.2016
Suomen Pankki – Finlands Bank – Bank of Finland
Negative deposit rates
The Governing Council of the ECB introduced negative deposit rate in June 2014, with three further reductions in September 2014, December 2015 and March of this year.
– In March the deposit rate was lowered to -0,4 %.
The main objectives of this measure are twofold:– to further lower money market rates and the longer end of the
yield curve via expectations effects– to increase the velocity of circulation of excess reserves in
the interbank market towards banks that need liquidity to sustain or expand their credit portfolios
6.6.2016 Governor Erkki Liikanen 21
Suomen Pankki – Finlands Bank – Bank of Finland
Channels of influence of a more accommodative monetary policy
Lowers real interest rates and eases financial conditions in the economy− interest rates at the longer end decline, financial conditions
for companies and households become easier, securities prices rise
− higher inflation expectations mean lower real interest rates
− corporate and household confidence improves
Increases demand and boosts inflation− consumption and profitability of investments increase− external value of the euro depreciates
6.6.2016 Governor Erkki Liikanen 22
Suomen Pankki – Finlands Bank – Bank of Finland
Euro area sovereign bond yields at low levels
0
1
2
3
4
5
6
2008 2009 2010 2011 2012 2013 2014 2015 2016
Germany Euro area average sovereign bond yield
%
10-year sovereign bond yield.Source: Macrobond. patu32422@pitkätkorot
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Suomen Pankki – Finlands Bank – Bank of Finland
Bank lending rates on household and corporate loans have decreased
-1
0
1
2
3
4
5
6
7
2003 2006 2009 2012 2015
3-month Euribor
Average interest rate on new household loans
Average interest rate on new corporate loans
%
Sources: ECB and Macrobond.32422@antolainakorot (sv)
6.6.2016 Governor Erkki Liikanen 24
Suomen Pankki – Finlands Bank – Bank of Finland
Growth in bank loans has accelerated
Governor Erkki Liikanen 256.6.2016
-4
-3
-2
-1
0
1
2
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.patu32422@lainakannat(sv)
Annual growth in loan stocks
Suomen Pankki – Finlands Bank – Bank of Finland
Corporate bond spreads have declined
6.6.2016 Governor Erkki Liikanen 26
Suomen Pankki – Finlands Bank – Bank of Finland6.6.2016 Governor Erkki Liikanen 27
On the Banking Union and the new responsibilities of the ECB
Suomen Pankki – Finlands Bank – Bank of Finland
ECB’s role in the new supervisory architecture
6.6.2016 Governor Erkki Liikanen 28
Governing CouncilMonetary Policy:
Price Stability
Macro-prudential Policy:Financial stability
Sources: Smets (2013) and Bank of Finland.
Financial and economic stability
Supervision offinancial institutions
Euro area EU
European SystemicRisk Board (ESRB)
European SupervisoryAuthorities
(EBA, ESMA, EIOPA)
European Central Bank (ECB)
ECB/SSM
Bank Supervision:Solvency and resilience of
individual banks
Suomen Pankki – Finlands Bank – Bank of Finland
ECB´s monetary policy andbank supervision separated
Governing Council
Supervisory Board(Draft decision)
Preparation
Decision-making
Monetary policy
European Central Bank (ECB)
Executive Board
Committees
Working Groups
Bank supervision
Colleges of Supervisors
WorkingGroups
29
Directorates
6.6.2016 Governor Erkki Liikanen
Directorates
Suomen Pankki – Finlands Bank – Bank of Finland
ECB reinforces but cannot substitute for national macroprudential policies in the euro area
National macroprudential authorities bear the main responsibility for 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
European Systemic Risk Board (ESRB) provides EU-level guidance to prevent and mitigate systemic risks
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Suomen Pankki – Finlands Bank – Bank of Finland
European Systemic Risk Board (ESRB) oversees the EU financial system
In response to the global financial crisis, the ESRB was established as a Union-level body to prevent and mitigate systemic risks
The ESRB monitors and assesses systemic risks, collecting views of both central bankers and supervisory authorities
To pursue its macroprudential mandate, the ESRB may issue risk warnings and policy recommendations
6.6.2016 Governor Erkki Liikanen 31
Suomen Pankki – Finlands Bank – Bank of Finland
Two main groups of macroprudentialtools
1) Tools directed (mainly) at financial institutions:– Countercyclical Capital Buffer– Capital buffers for Systemically Important Financial
Institutions
2) ”Borrower-based tools”: tools directed(mainly) at borrowers and terms and conditionsof loans: – Loan-to-value cap , Loan-to-income cap, Debt-service-
to-income cap, Amortisation requirements,…
In several countries, borrower-based toolsautomatically apply to loans made by branches of foreign banks
6.6.2016 Governor Erkki Liikanen 32
Suomen Pankki – Finlands Bank – Bank of Finland6.6.2016 Governor Erkki Liikanen 33
New financial regulatory architecture and monetary policy transmission
Suomen Pankki – Finlands Bank – Bank of Finland
The mandate of the ECB
Maintaining price stability is the primary objective of the ECB.
Without prejudice to price stability, the ECB shall support the general economic policies in the EU, including balanced economic growth.
Financial stability is key to realizing this mandate.
The SSM regulation assigns macroprudentialresponsibilities to the ECB, with power to apply tighter macroprudential requirements than the designated national macroprudential authorities.
6.6.2016 Governor Erkki Liikanen 34
Suomen Pankki – Finlands Bank – Bank of Finland
New financial regulatory architectureand monetary policy transmission
Monetary policy transmission more immune from disruption
• Banks more resilient to future shocks• New macroprudential instruments designed to improve
the stability of the financial system as a whole
Interaction of micro- and macroprudentialpolicy can enhance the effectiveness and efficiency of monetary policy
• Effective regulation protects monetary policy from financial dominance
Euro area less vulnerable to fragmentation The SSM creates the conditions and incentives for
deeper integration of the European banking market
6.6.2016 Governor Erkki Liikanen 35
Suomen Pankki – Finlands Bank – Bank of Finland
Thank you!
6.6.2016 Governor Erkki Liikanen 36