Transcript Transmission of monetary policy in the euro area

Bank of Finland Bulletin 4/2012
Monetary policy and the global economy
Governor
Erkki Liikanen
12 September 2012
12.9.2012
Erkki Liikanen
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
Themes
 Transmission of monetary policy in the euro area
– ECB Governing Council decided on new measures last week
– Market responses to the decisions
– Transmission of monetary policy and condition of the real
economy
 Bank of Finland forecast for the global economy
– Second half of 2012 muted
– Global economic growth will remain slow in 2012–2013
– Risks to the forecast primarily on the downside
12.9.2012
Erkki Liikanen
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
Transmission of monetary policy
in the euro area:
Decisions of the ECB Governing Council
12.9.2012
Erkki Liikanen
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
Decisions of the ECB Governing Council
on 6 September
 Governing Council decides to keep key interest rates unchanged
– Interest rate on main refinancing operations 0.75%, standing facilities
corridor 0%–1.50%
– Policy rates are in line with price stability
 Decision on a new programme: Outright Monetary Transactions
(OMTs)
– An appropriate monetary policy transmission and the singleness of the
monetary policy
– Conditionality: EFSF/ESM programme
– After this, the Governing Council’s decision in full discretion
– Target: purchases of programme countries’ short-term government bonds
(≤ 3 years)
12.9.2012
Erkki Liikanen
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
What do the decisions mean?
 The programme is European in nature
– Not for some countries against others
– Applicable to all euro area countries, if necessary
– The programme is in line with the ECB’s price stability mandate
 Purchases concentrate on short-term instruments
– Particularly government bonds, maturity 1–3 years
– Close to traditional monetary policy
– Short maturities also ease risk management
12.9.2012
Erkki Liikanen
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
Transmission of monetary policy
in the euro area:
Market responses to the decisions
12.9.2012
Erkki Liikanen
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
Yields on Spanish and Italian 10 year
government bonds
%
8,0
7,5
7,0
Spain
6,5
6,0
5,5
Italy
5,0
4,5
4,0
03/2012
05/2012
07/2012
09/2012
source: Bloomberg.
12.9.2012
Erkki Liikanen
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
Spread between highest rated 10-year
government bonds and Germany
%
2,00
1,75
1,50
1,25
France
1,00
Austria
0,75
Netherlands
0,50
0,25
Finland
0,00
07/2011
10/2011
01/2012
04/2012
07/2012
Source: Bloomberg
12.9.2012
Erkki Liikanen
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
Spanish and Italian yield curves
7
Spain 11 Sep 2012
Germany 11 Sep 2012
Italy 11 Sep 2012
Spain 1 Jun 2012
Germany 1 Jun 2012
Italy 1 Jun 2012
%
6
5
4
3
2
1
0
-1
3M
6M
1Y
2Y
3Y
4Y
5Y
6Y
7Y
Source: Bloomberg
12.9.2012
Erkki Liikanen
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
8Y
9Y
10Y
Stock pricesStock markets
USA: S&P500
140
Germany
Spain
4 Jan 2010 = 100
130
120
110
100
90
80
70
60
50
40
2010
2011
2012
Source: Bloomberg.
26339@Pörssi-indikaattoreita (en)
12.9.2012
Erkki Liikanen
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
Italy
Sovereign and banks’ credit risk go hand in hand
Spain
%-points
5y sovereign CDS
av. 5y CDS of some largest banks
Italy
%-points
5y sovereign CDS
av. 5y CDS of some largest banks
8
7
7
6
6
5
5
4
4
3
3
2
2
1
1
0
0
Source: Bloomberg and Bank of Finland calculations
12.9.2012
Erkki Liikanen
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
Monetary policy transmission in the euro area:
Financial intermediation and the real economy
12.9.2012
Erkki Liikanen
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
Interest rate differentials transmitted to the
credit market
Housing loans
Corporate loans
Difference between new corporate loans and
3-month Euribor
Difference between new housing loans*** and
3-month Euribor
High-rated countries*
3,5
GIIPS**
Euro area
% points
High-rated countries*
3,5
3
3
2,5
2,5
2
2
1,5
1,5
1
1
0,5
0,5
0
Euro area
% points
0
2005
2007
2009
2011
* Germany, France, the Netherlands, Belgium, Austria and Finland.
** Spain, Italy, Greece, Portugal ja Ireland.
*** Variable interest housing loans linked to reference rates with a rate
fixation period of at most 1 year.
2005
2007
Erkki Liikanen
2009
2011
* Germany, France, the Netherlands, Belgium, Austria and Finland.
** Spain, Italy, Greece, Portugal ja Ireland.
Sources: ECB and Bank of Finland calculations.
Sources: ECB and Bank of Finland calculations.
12.9.2012
GIIPS**
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
Shrinking deposit and lending stocks in GIIPS
countries
Yleisön lainakannan vuosikasvu / BKT
Loans to non-MFIs
High-rated countries*
20
GIIPS**
Yleisön talletuskannan vuosikasvu / BKT
Deposits
by non-MFIs
Euro area
% of GDP
High-rated countries*
15
15
GIIPS**
Euro area
% of GDP
10
10
5
5
0
0
-5
-5
2005
2007
2009
2011
* Germany, France, the Netherlands, Belgium, Austria and Finland.
** Spain, Italy, Greece, Portugal ja Ireland.
Sources: ECB and Bank of Finland calculations.
12.9.2012
Erkki Liikanen
2005
2007
2009
2011
* Germany, France, the Netherlands, Belgium, Austria and Finland.
** Spain, Italy, Greece, Portugal ja Ireland.
Sources: ECB and Bank of Finland calculations.
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
Progress of euro area adjustment:
Competitiveness and indebtedness
Unit labour costs
Wages/hour
15
Productivity/hour
Current account
High-rated countries*
Unit labour costs
% change 2009 Q1 - 2012 Q1
6
GIIPS*
Euro area
% of GDP
4
10
2
5
0
0
Ireland
Portugal
Spain
-5
Italy
Germany
Finland
France
-2
-4
-10
-6
-15
-8
Source: Eurostat.
2005
2006
2007
2008
Sources: ECB, Eurostat and Macrobond.
* Sum of countries’ current accounts.
12.9.2012
Erkki Liikanen
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
2009
2010
2011
2012
Major differences remain, turnaround still far
away
GDP
High-rated countries*
125
GIIPS**
Euro area
2000Q1 = 100
120
115
110
105
100
95
2000
2005
2010
*Germany, France, the Netherlands, Belgium, Austria and Finland.
** Greece (11-12 estimate), Ireland, Italy, Portugal and Spain.
Sources: Eurostat and Bank of Finland calculation.
12.9.2012
Erkki Liikanen
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
What has improved since the spring?
Clear division of crisis management duties
 Crisis countries’ own measures
–
Correction of structural distortions in the economy
 EU/IMF measures
–
Programmes, conditionality, safeguarding of bridge financing
 ECB measures
–
–
Safeguarding the operation of markets
Decisions of 6 September 2012
 All three measures and clear division of duties
essential
12.9.2012
Erkki Liikanen
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
Forecast for the global economy
12.9.2012
Erkki Liikanen
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
Industrial and consumer confidence at low
levels
Purchase managers’ indices
Consumer confidence
Purchase managers' indices: manufacturing
USA
65
Euro area
Japan
China
Consumer confidence indicators
USA
Brazil
Balance
100
Japan
Euro area (RHS)
Balance
Balance
0
60
90
-5
55
80
-10
50
70
-15
45
60
-20
40
50
-25
35
40
-30
30
30
-35
20
-40
25
2007
2008
2009
Source: Bloomberg.
25200@PMI_teollisuus (enET)
2010
2011
2012
2007
2008
2009
Erkki Liikanen
2011
2012
Sources: European Commission and Bloomberg.
25200@Chart87 (enET)
12.9.2012
2010
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
Unemployment on the increase, especially in
euro area
Main economic regions
Euro area
USA
Japan
Finland
Euro area,
Unemployment
High-rated countries*
Brazil
%
12
19
specified
GIIPS**
Euro area
%
17
10
15
8
13
6
11
4
9
2
7
0
5
2007
2008
2009
2010
2011
2012
Sources: BLS, Eurostat, Bloomberg and Statistics Finland.
23162@Työttömyys% (FI+B) en
12.9.2012
Erkki Liikanen
2005
2006
2007
2008
2009
2010
2011
2012
* Germany, France, the Netherlands, Belgium, Austria and Finland.
** Spain, Italy, Greece, Portugal and Ireland.
Sources: ECB and Bank of Finland calculations.
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
Inflation and commodity prices
Consumer prices price inflation
Consumer
USA
10
Euro area
Japan
China
Brazil
Commodity prices
Crude oil, North Sea Brent, USD/barrel
Finland
% change from previous year
Industrial raw materials excl. energy, USD (Right hand scale)
160
USD / barrel
Index 2010 = 100
140
8
120
120
6
140
100
100
80
4
80
60
2
60
0
40
40
-2
20
-4
0
2007
2008
2009
2010
Source: National statistical authorities.
2011
2012
20
0
1999 2001 2003 2005 2007 2009 2011 2013
Sources: Bloomberg and HWWI.
25200@Kuluttajahinnat (enET)
12.9.2012
Erkki Liikanen
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
Bank of Finland forecast assumptions
 Financial crisis can be brought under control with
adequate policy measures
– At national level: fiscal consolidation and structural measures
– At EU level: EFSF/ESM (programmes) and bank packages
– Eurosystem measures conditional on implementing the above
 Austerity measures weaken growth over the short
term
– Increasing confidence will lower the general level of interest
rates
– Slow adjustment of debt and competitiveness in crisis countries
– Growth outside crisis countries will pick up more quickly
=> Uncertainty is set to prevail for a long time
12.9.2012
Erkki Liikanen
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
Main outcomes of the Bank of Finland forecast:
GDP and world trade
% change on previous year (previous forecast in brackets)
GDP
United States
EU20
2011
2012f
2013f
2014f
1.8
2.2
2.2
2.6
(2.3)
(2.6)
(2.5)
-0.4
0.4
1.4
(-0.2)
(1.0)
(1.6)
2.5
0.6
1.1
(1.4)
(1.5)
(1.7)
6.3
6.6
6.3
(6.6)
(7.2)
(6.8)
3.2
3.5
3.7
(3.2)
(3.9)
(3.9)
3.1
4.8
6.0
(3.5)
(5.8)
(6.3)
1.4
Japan
-0.7
Non-Japan Asia
World
7.7
3.9
World trade
6.2
EU20 = Euro area, Sweden, Denmark and United Kingdom
12.9.2012
Erkki Liikanen
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
Main outcomes of the Bank of Finland forecast:
inflation
Inflation, EU20
Inflation, USA
Inflation, Japan
6
Inflation forecast, EU20
Inflation forecast, USA
Inflation forecast, Japan
%
5
4
3
2
1
0
-1
-2
-3
2008
2009
2010
2011
2012
2013
2014
Sources: National statistical authorities and Bank of Finland calculations.
25276@eInf laatio (enET)
12.9.2012
Erkki Liikanen
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
General government deficits cannot be
corrected without further measures
2012
Budget deficit, autumn 2011 forecast
Impact of cyclical conditions
Impact of discretionary measures
Impact of other factors
Budget deficit, Bank of Finland autumn 2012 forecast
Budget deficit, autumn 2011 forecast
Impact of cyclical conditions
Impact of discretionary measures
Impact of other factors
Budget deficit, Bank of Finland autumn 2012 forecast
% of GDP (2012)
2
-6
-8.0
-8
-10.0
-10
-12.0
-12
12.9.2012
Erkki Liikanen
Sources: European Commission projections and calculations by Bank of Finland.
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
Japan
United States
Espain
Italy
United Kingdom
-4
-6.0
Sources: European Commission projections and calculations by Bank of Finland.
France
Japan
United States
United Kingdom
Espain
Italy
France
Germany
Euro area
-4.0
-2
Germany
0
0.0
-2.0
% of GDP (2013)
Euro area
2.0
2013
Risks mainly on the downside
 Main downside risks relate to the euro area situation
– Measures turn out to be inadequate (data, decisions,
implementation)
– Growth expectations critical for credible debt sustainability
– Failure in breaking the vicious circle
 Fiscal risks also significant in the United States
– Positive forecast assumption: no shock adjustment from the
beginning of 2013
– In the absence of agreement on adjustment, fiscal policy would
be tightened abruptly
– A halt in US economic growth would have wide spillover effects
12.9.2012
Erkki Liikanen
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND
There are also upside risks
 Confidence may improve faster than assumed
– A clear division of crisis management duties to solve the debt
problem
– Credibility would be restored more quickly than in the baseline
– Interest rates would decline more rapidly
– Adjustment measures easier to carry out in a more favourable
growth environment
 Positive signs in the US economy
– The worst phase of private-sector adjustment could be over
– Abundant pent-up demand in the housing market
– Rising asset prices could trigger a virtuous circle
12.9.2012
Erkki Liikanen
SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND