Transcript Market developments and cyclical indicators

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
65
Euro area
Japan
China
Brazil
Balance
60
55
50
45
40
35
30
25
2007
2008
Source: Bloomberg.
2009
2010
2011
2012
25200@PMI_teollisuus (enET)
15.3.2012
Erkki Liikanen
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
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Major changes in confidence
Consumer confidence indicator
USA
100
Japan
Euro area (RHS)
Balance
Balance
0
90
-5
80
-10
70
-15
60
-20
50
-25
40
-30
30
-35
20
-40
2007
2008
2009
2010
2011
2012
Sources: European Commission and Bloomberg.
25200@Chart87 (enET)
15.3.2012
Erkki Liikanen
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
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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
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Erkki Liikanen
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
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Some improvement on the government bond
markets
18
10 year government bond yield, %
Portugal
16
14
12
Ireland
10
8
Italy
6
4
Spain
Finland
2
Germany
0
2008
2009
2010
2011
Source: Reuters.
15.3.2012
Erkki Liikanen
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
2012
25874
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
ECB Main Refinancing Rate
Interbank overnight rate Eonia
6
%
ECB liquidity facility rate
5
4
3
2
1
ECB overnight deposit facility rate
0
2005
2006
2007
2008
Sources: ECB and Reuters.
15.3.2012
Erkki Liikanen
2009
2010
2011
2012
25384@Chart27 (en)
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Country specific differences in financial
conditions are still large
Euro area
Yritys- ja kotitalouslainojen vuosikasvu*
Non-financial corporations
16
Finland
Euro area
Households
%
16
14
14
12
12
10
Finland
MFI loans to private sector, y/y, %
10
8
8
6
6
4
4
2
0
2
-2
0
-4
-2
2005
2007
2009
2011
2007
2008
2009
2010
2011
2012
Sources: European Central Bank and Bank of Finland.
Source: ECB.
25840@Chart48 (en)
25827
15.3.2012
Erkki Liikanen
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
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European crisis management framework
Lisbon Treaty
Broad guidelines
for economic policy
Avoidance of
excessive deficits
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
Special rules for
euro area countries
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
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SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
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Bank of Finland‘s global economy forecast
15.3.2012
Erkki Liikanen
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
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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
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Bank of Finland’s forecast outcomes
GDP
United States
2010
3,0
EU20
1,9
Japan
4,5
China
10,4
Russia
4,3
World
5,3
World trade
13,7
2011f
1,7
(1,5)
1,5
(1,6)
-0,9
(-0,6)
9,2
(9)
4,3
(4,4)
3,8
(3,9)
6,0
(6,2)
2012f
2,3
(1,9)
-0,2
(0,9)
1,4
(2,4)
8
(8)
3,7
(4,4)
3,2
(3,6)
3,5
(6,1)
2013f
2,6
(2,6)
1,0
(1,6)
1,5
(1,3)
8
(8)
3,7
(3,6)
3,9
(4,0)
5,8
(7,1)
2014f
2,5
1,6
1,7
7
3,4
3,9
6,3
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
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Inflation slows during the current year
Inflation
Inflation expectations
5-years inflation expectations 5-years time
Consumer prices
USA
10
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
3
4
2
2,5
0
2
-2
1,5
-4
2007
2008
2009
2010
Source: National statistical authorities.
25200@Kuluttajahinnat (enET)
2011
2012
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 Bank of Finland calculations.
25456@ET 2012-1 (en)
15.3.2012
Erkki Liikanen
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
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Why is this crisis different:
slow recovery from financial crises
106
GDP
104
102
Recessions excl.
financial crises
Recessions related
to financial crises
100
USA 2008–
Euro area 2008–
Finland 2008–
98
96
94
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14
Horizontal axis: time since peak in quarters.
25856
Vertical axis: median of observations, index: peak = 100.
Sources: IMF WEO April 2009, Eurostat, BEA, and Statistics Finland.
15.3.2012
Erkki Liikanen
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
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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
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Major internal differences in the euro area
15.3.2012
Erkki Liikanen
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
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Faster inflation than elsewhere and the resultant low
level of real interest rates led to over-indebtedness in
GIPS countries
125
other EA countries
Spain
Germany
Index, 1999 = 100
Ireland
Portugal
Greece
Euro area
120
115
110
105
100
95
Source: Eurostat
25005
Developments in euro area countries’ consumer prices vis-à-vis Germany, 1999-2011.
15.3.2012
Erkki Liikanen
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
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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
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Italy, Spain and France implementing strongest
adjustments
2012
2013
Euro area Fiscal Consolidation Country Breakdown
Other euro
area
countries
11 %
Netherlands
10 %
Spain
34 %
Euro area Fiscal Consolidation Country Breakdown
Other euro
area countries
21 %
Italy
28 %
Italy
28 %
Spain
16 %
France
35 %
France
17 %
Sources:
IMF, European Commission, announcements by countries and Bank of
Finland calculations.
15.3.2012
Erkki Liikanen
Sources:
IMF, European Commission, announcements by countries and Bank of
Finland calculations.
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
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Italy, Spain and France implementing strongest
adjustments
2012
2013
Euro area Fiscal Consolidation - Country
Breakdown
Other euro area
countries
13 %
Spain
29 %
Euro area Fiscal Consolidation - Country
Breakdown
Other euro
area countries
19 %
Spain
25 %
Netherlands
10 %
Italy
25 %
Italy
30 %
Sources:
IMF, European Commission, announcements by countries and Bank of
Finland calculations.
15.3.2012
Erkki Liikanen
France31 %
France
18 %
Sources:
IMF, European Commission, announcements by countries and Bank of
Finland calculations.
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
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Large differences in youth unemployment by
country
Unemployment and youth unemployment
Youth
Spain
Portugal Ireland
Italy
Sweden Finland Germany
2011
2007
2011
2007
2011
2007
2011
2007
2011
2007
2011
2007
2011
2007
2011
2007
50
45
40
35
30
25
20
15
10
5
0
All
%
Euro
area
Source: Eurostat.
15.3.2012
Erkki Liikanen
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
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Financial crisis affected different areas in
different countries
Sector specific employment trends
6
Change in number of jobs
Share of construction sector
Share of industry
% change
3
0
Ireland
-3
Spain
Finland
Italy
France
Germany
-6
-9
-12
-15
-18
15.3.2012
Change calculated between post 2005 employment peak and
employment situation in 2011/Q3.
Source: Eurostat
Erkki Liikanen
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
24
Recent monetary policy measures
15.3.2012
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SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
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Monetary policy globally accommodative
Central bank interest rates
Central Bank policy rates
7
USA: fed funds target rate
Japan: over night rate
Euro system: main refinancing rate*
UK: repo rate
Sweden: repo rate
%
Central bank balance
sheets
Central Bank balance sheets
FED
35
6
30
5
25
4
20
3
15
2
10
1
5
0
BOJ
ECB
BOE
Riksbank
% of GDP
0
2003
2005
2007
2009
2011
* To 15 Oct 2008, minimum bid rate
Source: Bloomberg.
15.3.2012
Erkki Liikanen
25200@Keskuspankkikorkoja (enET)
2007
2008
2009
2010
2011
2012
Sources: National statistical authorities, Eurostat ja Bloomberg.
25200@KP_taseet (enET)
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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
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Refinancing operations by maturity
Monetary policy operations
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)
1 200
1 000
800
600
400
200
0
-200
-400
-600
-800
-1 000
-1 200
EUR bn
2007
2008
Source: Bank of Finland.
15.3.2012
Erkki Liikanen
2009
2010
2011
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
2012
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
euribor- ja repokorkoj
kuukaudenindicators
3 ja 12 market
1,
Otsikko
VSTOXX index (LHS)
1 month
iTraxx Europe Finance (RHS)
100
400
80
320
60
240
2,5
3 month
12 month
Percentage points
2,0
1,5
1,0
40
160
0,5
20
0
2008
2009
2010
Source: Bloomberg.
25902@Pankkiriski (en)
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Erkki Liikanen
2011
2012
80
0,0
0
-0,5
2008
2009
2010
2012
2011
Source: Bloomberg.
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
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Sovereign risk premia have also decreased
10-year Italian
Italian
10v. korkotuotto
government
bonds
Italy
Spain
average
%
8
10-year Spanish
Espanjan
10v. korkotuotto
government
bonds
8
7
7
6
6
5
5
4
4
3
3
2
average
%
2
1999 2001 2003 2005 2007 2009 2011
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
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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
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