ecb's monetary policy
TRANSCRIPT
Bank of Finland
ECB’s monetary policyThe condition of the banks and key unresolved issues in the global economy
Press conference 21 March 2016
121.3.2016
Erkki Liikanen
Suomen Pankki – Finlands Bank – Bank of Finland
Monetary policy was eased on 10 March 2016 with the adoption of a comprehensive monetary policy package.
21.3.2016 Erkki Liikanen 2
Suomen Pankki – Finlands Bank – Bank of Finland
Objectives of the March monetary policy decisions:
To further ease financing conditions in euro area countries
To foster increased lending
BACKGROUND:
Weakened outlook for global economy Tightening of financing conditions in early year Subdued inflation outlook
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Suomen Pankki – Finlands Bank – Bank of Finland
Inflation outlook weakened and expectations subdued
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Suomen Pankki – Finlands Bank – Bank of Finland
Still weak consumer price inflation
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-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.
Euro area consumer price inflation (HICP)
Suomen Pankki – Finlands Bank – Bank of Finland
Oil price strongly depressing short-term inflation expectations
Erkki Liikanen 621.3.2016
20
40
60
80
100
120
140
-1
-0.5
0
0.5
1
1.5
2
2.5
2014 2015 2016
1-year inflation-linked swap rate5-year inflation rate 5 years ahead10-year inflation-linked swap rateOil price (Brent) (right-hand scale)
% USD/barrel
Sources: Bloomberg, Macrobond and calculations by the Bank of Finland.
22/10 3/12
Suomen Pankki – Finlands Bank – Bank of Finland
1
1.5
2
2.5
3
3.5
4
2009 2010 2011 2012 2013 2014 2015 2016
Market expectations, euro area Market expectations, USA
SPF survey, euro area SPF survey, USA
%
Sources: Bloomberg, ECB, Fed of Philadelphia and Marcobond.Market expectations are based on 5-year and 10-year inflation-linked swap rates. The SPF survey horizon extends five years ahead.
Long-term inflation expectations have weakened again in euro area and USA
Erkki Liikanen 721.3.2016
Suomen Pankki – Finlands Bank – Bank of Finland
What monetary policy decisions were taken on 10 March?
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Suomen Pankki – Finlands Bank – Bank of Finland
Governing Council decisions in March 2016
Monetary policy rates were lowered– Key interest rate (MRO) to 0.0% (change -5 bp)– Deposit facility rate to -0.40% (-10 bp)
Monthly purchase volumes in the extended asset purchase programme (EAPP) were expanded (by €20 bn) to €80 bn as of 1 April 2016– Investment-grade bonds issued by non-banking-sector corporations
were included on list of assets eligible for purchase 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.
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Suomen Pankki – Finlands Bank – Bank of Finland
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 beyond the horizon of the asset purchases.
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Suomen Pankki – Finlands Bank – Bank of Finland
Transmission of monetary policy:
The historically accommodative stance of monetary policy supports economic recovery and price stability through several transmission channels.
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Suomen Pankki – Finlands Bank – Bank of Finland
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.
Euro area sovereign bond yields at low levels
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Suomen Pankki – Finlands Bank – Bank of Finland
-1
0
1
2
3
4
5
6
7
2003 2006 2009 2012 2015
3-month EuriborAverage interest rate on new corporate loansAverage interest rate on new household loans
%
Sources: ECB and Macrobond.
Bank lending rates on household and corporate loans have decreased
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Suomen Pankki – Finlands Bank – Bank of Finland
-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.
Annual growth in loan stocks
Growth in bank loans has accelerated
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Bank of Finland
Condition of the banks
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Erkki Liikanen
21.3.2016
Suomen Pankki – Finlands Bank – Bank of Finland
Evolution of large banks’ share prices at the beginning of the year
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60
70
80
90
100
110
1.1.2016 1.2.2016 1.3.2016
Japan United States Europe Nordic countries
Index, 2016 = 100
Source: Bloomberg.
Suomen Pankki – Finlands Bank – Bank of Finland
Euro area banks increased their capital
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13.5 13.114.3
15.5 15.616.2
13.7 13.1
6
8
10
12
14
16
18
2010 2011 2012 2013 2014 2015Q3
%
Source: European Central Bank.
Total capital adequacy ratio Tier 1 ratioCommon Equity Tier 1 ratio
Suomen Pankki – Finlands Bank – Bank of Finland
Banks’ financial results improved since the crisis(Return on equity, ROE)
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4.3
7.1
-30
-25
-20
-15
-10
-5
0
5
10
15
20
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
%
*Reunamaat = CY, ES, GR, IE, IT ja SI.**Ydinmaat = AT, BE, DE, FI, FR ja NL.2015 käsittää ne pankit, jotka ovat raportoineet vuoden 2015 lopun tulinpäätöksen 16.3.2016 mennessä.Lähde: Snl.
Reunamaat* - mediaani Reunamaat - painottamaton keskiarvoYdinmaat -mediaani** Ydinmaat - painottamaton keskiarvo
21.3.2016
*Non-core countries = CY, ES, GR, IE, IT and SI.**Core-countries = AT, BE, DE, FI, FR and NL.*** 2015 covers all banks that have reported year-end financial statement by 16 March 2016Source: Snl.
***
Non-core countries, median *Non-core countries, unweighted average *Core-countries, median**Core-countries, unweighted average **
Suomen Pankki – Finlands Bank – Bank of Finland
The differential between bank lending and deposit rates has decreased
Erkki Liikanen 1921.3.2016
Suomen Pankki – Finlands Bank – Bank of Finland
Non-performing loans weigh on banks
The problem of non-performing loans particularly affects mid-sized banks in countries hit by the crisis.
The amount of non-performing loans has decreased in some countries, but progress is uneven and takes time.
A swift reduction in non-performing loans is essential for banks’ ability to grant new loans.
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Suomen Pankki – Finlands Bank – Bank of Finland
Tax-payers’ or creditors’ responsibility?
The crisis resolution framework that entered into force at the beginning of the year emphasises creditor involvement in situations where a bank runs into trouble.
Functions critical to society can be preserved and problems dealt with in an orderly manner.
The transition to the new resolution framework will not be easy, but it is important to complete it.
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Bank of Finland
Structural change in China’s economy
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Erkki Liikanen
21.3.2016
Suomen Pankki – Finlands Bank – Bank of Finland
Will China’s economic growth slow down?
Growth has been slowing and the transition towards a different growth model been ongoing for years already.
Policy has facilitated this change in China’s growth model in a number of ways, including easing of the monetary policy stance.
Capital movements have also been liberalized, including direct foreign investment by Chinese investors.
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Suomen Pankki – Finlands Bank – Bank of Finland
Growth slowdown and transition towards a different growth model have been ongoing for several years already
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02468
101214161820
2008 2009 2010 2011 2012 2013 2014 2015
GDP Industrial output Retail salesReal annual change, %
Source: Macrobond.
Suomen Pankki – Finlands Bank – Bank of Finland
Volume of China’s commodities imports not decreased much
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60
80
100
120
140
160
180
2009 2010 2011 2012 2013 2014 2015 2016
Crude oil Iron ore Copper Pulp
Index 2009 = 100, 3-month moving average
Source: Macrobond.
China's commodities import volume
Suomen Pankki – Finlands Bank – Bank of Finland
Bank of Finland’s economists’ forecast on China
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-4
-2
0
2
4
6
8
10
12
14
2008 2010 2012 2014 2016 2018
Net exports Investment Consumption GDP
Sources: NBSC and BOFIT
% Forecast
Suomen Pankki – Finlands Bank – Bank of Finland
China’s exchange rate appreciated significantly over past decade
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5
6
7
8
9
10
11
1280
90
100
110
120
130
140
150
2005 2007 2009 2011 2013 2015
Real trade-weighted exchangerateEUR/CNY (rhs)
USD/CNY (rhs)
Index 2010 = 100 EUR/CNY and USD/CNY
Sources: BIS, Bloomberg.
Bank of Finland
Climate change and the financial sector
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Erkki Liikanen
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Suomen Pankki – Finlands Bank – Bank of Finland
Paris climate agreement is crucial
“This is a historic moment, not just for us and our world today, but for our children, our grandchildren and future generations. The Paris Agreement is a turning point in the world’s fight against unmanaged climate change…”
Nicholas Stern’s comments on the Paris climate agreement (press release dated 12 December 2015).
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Suomen Pankki – Finlands Bank – Bank of Finland
What are the financial implications of climate change?
Climate change is a global problem with significant costs– Climate policy implies sharing costs temporally and
geographically
It affects economic growth, inflation and financial stability and adds to uncertainty– Implications for growth and financial stability
are assessed to be mainly negative, also over the short term
Analysing the implications for financial stability is crucial.
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Suomen Pankki – Finlands Bank – Bank of Finland
How does climate change affect financial stability?
The increasing frequency and amplitude of extreme weather events leads to an increase in financial losses– The value of banks’ investment portfolios and
debtors’ debt servicing ability decrease; insurance companies reimburse damages covered by insurance policies.
Restrictions of emissions create uncertainty regarding the business continuity of companies generating significant emissions in their business– The risk concerns a significant share of globally
traded securities, and banks have been lending to these companies.
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Suomen Pankki – Finlands Bank – Bank of Finland
Why is determination and rapid progress important in climate policy?
Climate change is taking place now and cannot be stopped immediately– Decisions taken and investments made will have an
impact for decades ahead.– Emissions remain in the atmosphere for decades.
Determined and consistent climate policy will minimise adverse effects – also for financial stability.
It is better to take the right decisions now than to wait.– Principle of prudence– No unnecessary limits to alternatives– Precarious to trust on salvation by innovation
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Bank of Finland
Bank of Finland financial statements and result
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Erkki Liikanen
21.3.2016
Suomen Pankki – Finlands Bank – Bank of Finland
Central bank result discloses prevailing monetary policy
The central bank's primary task is to take measures to ensure price stability in the euro area. The profit of the central bank is generated as a result of these operations.
The Bank of Finland operates efficiently and aims to ensure distribution of profit to the State.
The Bank of Finland's income consists of interest income on banknotes and monetary policy items as well as investment income on foreign reserves and other financial assets of the Bank.
The accommodative monetary policy shows in the Bank's balance sheet and profit and loss account. Interest income has decreased due to the low interest rates.
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Suomen Pankki – Finlands Bank – Bank of Finland 35
Total risks (excl. gold) in relation to balance sheet risk buffers 31 Dec 2015
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Suomen Pankki – Finlands Bank – Bank of Finland
Bank of Finland profit and distribution of profit to the State 2000–2015
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309
254
163177
112
200
293
410 401420
283254
337
239
150 146129
9981.5 88.4
56
134
186
250 250 260
195 185
227
180
138
98
0
50
100
150
200
250
300
350
400
450
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Profit for the financial year Distribution to the State
EUR million
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0100200300400500600700800900
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Changes in headcount, 1970-2015Bank of Finland Financial Supervisory Authority
Erkki Liikanen
Suomen Pankki – Finlands Bank – Bank of Finland
Thank you!
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