Transcript Monetary policy in the early months of 2015

Erkki Liikanen
Suomen Pankki
Monetary policy
in the early months of 2015
25.3.2015
Sisäinen
1
Outlook in late 2014
25.3.2015
Erkki Liikanen
Suomen Pankki – Finlands Bank – Bank of Finland
Sisäinen
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Eurosystem projections in December 2014
 GDP:
2015: 1.0%
2016: 1.5%
 Inflation:
2015: 0.7%
2016: 1.3%
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Erkki Liikanen
Suomen Pankki – Finlands Bank – Bank of Finland
Sisäinen
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The markets’ inflation expectations fell
sharply in late 2014
25.3.2015
Erkki Liikanen
Suomen Pankki – Finlands Bank – Bank of Finland
Sisäinen
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At the turn of the year, the markets expected inflation
to be lower than the price stability objective for
several years
4,0
%
3,5
3,0
2,5
2,0
1,5
1,0
0,5
0,0
-0,5
-1,0
2012
2013
2014
2015
2016
2017
2018
2019
2020
Lähteet:
Eurosta,
Bloomberg
ja Suomen
Pankin
laskelmat.
Sources:
Eurostat,
Bloomberg
and
Bank
of Finland calculations.
25.3.2015
Erkki Liikanen
Suomen Pankki – Finlands Bank – Bank of Finland
Sisäinen
5
Deflation probability based on the distribution of
inflation expectations had risen by mid-January
50
Probability, %
45
40
35
30
25
20
15
10
5
0
-2 - -1
-1 - 0
0-1
1-2
2 -3
3-4
4-5
5-6
Expected 5-year inflation rate, %
EAPP = expanded asset purchase programme
Source: Bank of Finland calculations.
eurojatalous.fi
18.3.2015
25.3.2015
Erkki Liikanen
Suomen Pankki – Finlands Bank – Bank of Finland
Sisäinen
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Monetary policy decisions in 2014 and 2015: new
instruments, price stability objective unchanged
interest rate policy, credit support, extensive securities
purchases and guidance of expectations
25.3.2015
Erkki Liikanen
Suomen Pankki – Finlands Bank – Bank of Finland
Sisäinen
7
Interest rate policy in 2014

Central bank interest rates reduced to the zero
lower bound
−
−

25.3.2015
Erkki Liikanen
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.
Suomen Pankki – Finlands Bank – Bank of Finland
Sisäinen
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Measures to support provision of
credit in 2015
 Banks will be provided 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 60 billion
 Asset-backed securities purchase programme
(ABSPP)
− Since November 2014, purchases conducted to the value of
EUR 4 billion
25.3.2015
Erkki Liikanen
Suomen Pankki – Finlands Bank – Bank of Finland
Sisäinen
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Key contents of the new decisions 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 will be continued, if necessary, even after September 2016 until
the Governing Council of the ECB considers the inflation rate has returned
to levels consistent with the price stability objective .
25.3.2015
Erkki Liikanen
Suomen Pankki – Finlands Bank – Bank of Finland
Sisäinen
10
Channels of influence of a more
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, securities prices rise
− higher inflation expectations mean lower real interest rates
− corporate and household confidence improves
 Increases demand and boosts inflation
− consumption and the profitability of investments increase
− external value of the euro depreciates
25.3.2015
Erkki Liikanen
Suomen Pankki – Finlands Bank – Bank of Finland
Sisäinen
11
Early impact of monetary policy
measures
25.3.2015
Erkki Liikanen
Suomen Pankki – Finlands Bank – Bank of Finland
Sisäinen
12
ECB staff macroeconomic projections in March 2015
(change relative to December 2014 Eurosystem projections)
 GDP:
2015: 1.5% (+0.5)
2016: 1.9% (+0.4)
2017: 2.1%
 Inflation:
2015: 0.0% (-0.8)
2016: 1.5% (+0.2)
2017: 1.8%
25.3.2015
Erkki Liikanen
Suomen Pankki – Finlands Bank – Bank of Finland
Sisäinen
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Recovery in market-based inflation
expectations after monetary policy measures
25.3.2015
Erkki Liikanen
Suomen Pankki – Finlands Bank – Bank of Finland
Sisäinen
14
Monetary policy has reduced the
probability of deflation
Before EAPP, 13.1.2015
60
After EAPP, 18.3.2015
Probability, %
50
40
30
20
10
0
-2 - -1
-1 - 0
0-1
1-2
2 -3
3-4
4-5
5-6
Expected 5-year inflation rate, %
EAPP = expanded asset purchase programme
Source: Bank of Finland calculations.
eurojatalous.fi
18.3.2015
25.3.2015
Erkki Liikanen
Suomen Pankki – Finlands Bank – Bank of Finland
Sisäinen
15
Sharp fall in long-term bond yields over
the past year
Germany
6
Weighted average (excl. Greece)
%
5
4
3
2
1
0
2008
2009
2010
2011
2012
2013
2014
2015
Sources: Bloomberg and calculations by the Bank of Finland.
25.3.2015
Erkki Liikanen
Suomen Pankki – Finlands Bank – Bank of Finland
Sisäinen
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Short-term government bond yields: broadbased decline into negative territory
Germany
5,0
2-year weighted average (excl. Greece)
%
4,0
3,0
2,0
1,0
0,0
-1,0
2005
2007
2009
2011
2013
2015
Sources: Bloomberg and calculations by the Bank of Finland.
25.3.2015
Erkki Liikanen
Suomen Pankki – Finlands Bank – Bank of Finland
Sisäinen
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Monetary policy impacts:
average interest rates on new housing loans
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Erkki Liikanen
Suomen Pankki – Finlands Bank – Bank of Finland
Sisäinen
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Monetary policy impacts:
transmission improved, but still uneven
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Erkki Liikanen
Suomen Pankki – Finlands Bank – Bank of Finland
Sisäinen
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Loan stock improved
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Erkki Liikanen
Suomen Pankki – Finlands Bank – Bank of Finland
Sisäinen
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Euro fallen strongly against the dollar since
the divergence in interest rate outlooks
1,8
1,6
1,4
1,2
1
0,8
0,6
1999
2001
2003
2005
2007
2009
2011
2013
2015
Source: Bloomberg
25.3.2015
Erkki Liikanen
Suomen Pankki – Finlands Bank – Bank of Finland
Sisäinen
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Extremely accommodative monetary
policy essential, but on its own
insufficient
25.3.2015
Erkki Liikanen
Suomen Pankki – Finlands Bank – Bank of Finland
Sisäinen
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Accommodative monetary policy effective, if
supported by measures in other areas of
economic policy
 Sustainable growth cannot be based on excessive
debt in either the public or the private sector:
− there is a need for growth and structural reforms to strengthen the
public finances as well as balance sheet adjustments in different
sectors;
− the need is greater in countries with limited scope for increasing
public sector demand, or where the working-age population is no
longer growing;
− consistent adherence to the Stability and Growth Pact will sustain
the credibility of the public finances.
25.3.2015
Erkki Liikanen
Suomen Pankki – Finlands Bank – Bank of Finland
Sisäinen
23
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;
− an absolute requirement is the existence of effective
macroprudential tools in each Member State.
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Erkki Liikanen
Suomen Pankki – Finlands Bank – Bank of Finland
Sisäinen
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Euro & talous contains two feature
articles:
 Tomi Kortela: Is the euro area at risk of Japanesestyle deflation?
 With its new monetary policy measures, the euro
area has reduced the risk of Japanese-style
deflation.
 Jarmo Kontulainen and Tuomas Välimäki: The
financial crisis changed the instruments but not the
objectives of monetary policy
 Commitment to an accommodative monetary
policy stance is all the more important, the lower
interest rates are and the further inflation
expectations are below the price stability objective.
25.3.2015
Erkki Liikanen
Suomen Pankki – Finlands Bank – Bank of Finland
Sisäinen
25
Bank of Finland’s result and profit
distribution
25.3.2015
Erkki Liikanen
Suomen Pankki – Finlands Bank – Bank of Finland
Sisäinen
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Profit EUR 150 million
 Low interest rates have had and will continue to have a weakening
effect on the Bank’s result.
 In 2014, the Bank’s profit amounted to EUR 150 million (2013: EUR 239
million), of which EUR 137.5 million (2013: EUR 180 million) has been
made available for the needs of the State.
 Central banks still have significant exposures and risks. The new
monetary policy operations have expanded the balance sheet and
increased the interest rate risk. The balance sheet has accordingly
been strengthened through additional provisions.
 The result is mainly composed of income from monetary policy items
(EUR 191 million) and investment income (EUR 113 million). Operating
income covers operating expenses (EUR 89 million), profit distribution
to the State and provisions.
21.7.2015
Erkki Liikanen
Suomen Pankki – Finlands Bank – Bank of Finland
Sisäinen
Result and profit distribution 20022014
450
410
420
401
400
337
350
293
300
283
250
250
260
254
250
227
200
200
177
163
150
195
186
185
239
180
150
137.5
134
112
100
81.5
88.5
56
50
0
Profit for the financial year
21.7.2015
Erkki Liikanen
Profit distribution to the State
Suomen Pankki – Finlands Bank – Bank of Finland
Sisäinen
Thank you!
25.3.2015
Erkki Liikanen
Suomen Pankki – Finlands Bank – Bank of Finland
Sisäinen
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