Monetary Policy and the Global Economy
Bank of Finland Bulletin 4/2014
Governor Erkki Liikanen
16.9.2014
Julkinen
1
Monetary policy and the global economy:
a time for decisive action
I.
Monetary policy has been further relaxed
- Economic growth weakened during the summer
- Volatility in inflation expectations
II. Forecast for the global economy and risks
- Geopolitical risks have hit the headlines
- Risk: limited leeway for economic policy
III. Economic policy facing big questions
- Monetary policy alone cannot resolve the crisis
- Economic policy challenges will persist even if the
financial crisis ends
16.9.2014
Bank of Finland Bulletin 4/2014
Julkinen
2
I. Monetary policy has been further
relaxed
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Bank of Finland Bulletin 4/2014
Julkinen
3
Monetary policy decisions of the Governing
Council of the ECB
• In June the Governing Council decided on a sizeable
combination of monetary policy measures
• The package was complemented and reinforced in
September
• Underlying the decisions:
– Low levels of actual inflation
– A slight downward volatility in inflation expectations
– Weak economic performance and a subdued outlook
for growth
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Bank of Finland Bulletin 4/2014
Julkinen
4
Five monetary policy decisions in June
Interest rate and liquidity policy measures:
1.
ECB policy rates were lowered
2.
Sterilisation of liquidity injected via SMP purchases was
suspended
3.
Full allotment liquidity policy to be continued until the end of
2016
Measures to enhance monetary policy transmission:
4.
Supporting bank lending with new targeted longer-term
refinancing operations (TLTROs)
5.
Intensifying preparatory work related to outright purchases of
asset-backed securities
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Bank of Finland Bulletin 4/2014
Julkinen
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Supplementary and additional monetary
policy measures in September
Measures relating to interest rate policy:
1. ECB interest rates decreased to historic lows
Measures enhancing the functioning of the
monetary policy transmission mechanism:
2. Asset-backed securities purchase programme
(ABSPP)
3. Covered bond purchase programme (CBPP3)
•
16.9.2014
Expands, relative to the June decisions, the range of private
sector assets that can be purchased.
Bank of Finland Bulletin 4/2014
Julkinen
6
Package of June and September
decisions
• Measures
– to bring down interest rates and generally ease financial
conditions
– to support financial intermediation
– to safeguard the maintenance of price stability in the euro
area
• Policy rates lowered to the zero bound
• Eurosystem balance sheet will grow significantly
– A series of fixed-rate targeted longer-term refinancing
operations (TLTROs), aimed at non-financial
corporations, in particular, will commence in September.
– Purchases of ABSs and covered bonds will commence in
October.
16.9.2014
Bank of Finland Bulletin 4/2014
Julkinen
7
Interes rate cuts bring money market
Interes rate
cutsto
bring
market interest low
interest
rates
anmoney
unprecedented
rates to an unprecedented low
Eurosystem key policy rate
Marginal lending rate
3-month euribor
2,5
Overnight deposit rate
Eonia
12-month euribor
%
2
1,5
1
0,5
0
-0,5
2010
2011
2012
Sources: ECB and Reuters.
16.9.2014
Bank of Finland Bulletin 4/2014
2013
2014
Julkinen
8
Differences in interest rate expectations and
in long-term interest rates widened;
euro exchange rate weakened
Market expectations regarding US short-term
interest rate 1 to 2 years ahead
EURUSD (left-hand scale)
United States (fed funds, year-on-year)
Euro area (Eonia, year-on-year)
1.2
%
1.42
Effective exchange rate of the euro (EER-20) (right-hand scale)
Index
EURUSD
106
1
1.40
105
0.8
1.38
104
0.6
1.36
103
0.4
1.34
102
0.2
1.32
101
0
1.30
100
1.28
-0.2
01/2014
03/2014
05/2014
07/2014
09/2014
Source: Bloomberg.
Market expectations regarding euro area shortterm interest rate 1 to 2 years ahead
16.9.2014
Bank of Finland Bulletin 4/2014
99
01/2014
03/2014
05/2014
07/2014
09/2014
Source: Bloomberg.
Euro depreciated against US dollar and an average of a
broad range of currencies
Julkinen
9
Balance sheet effects in part the outcome of bank
measures, in part due to outright purchases
FED
40
Eurosystem
BOJ
BOE
Balance sheet change, 2008/1, percentage point of GDP
35
30
25
20
15
10
5
0
-5
2008
2009
2010
2011
2012
2013
2014
Sources: National statistical authorities, Eurostat and Bank of Finland calculations.
16.9.2014
Bank of Finland Bulletin 4/2014
Julkinen
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Determination to take additional measures,
if necessary
‘Should it become necessary to further address
risks of too prolonged a period of low inflation,
the Governing Council is unanimous in its
commitment to using additional unconventional
instruments within its mandate.’
Governing Council of the
ECB, 4 September 2014
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Bank of Finland Bulletin 4/2014
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II. Forecast for the global economy and
risks
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Bank of Finland Bulletin 4/2014
Julkinen
12
Economic crisis escalated six years ago
United States
125
EU21
Japan
China (right-hand scale)
GDP: 2008/I = 100
GDP: 2008/I = 100
200
120
180
115
160
110
140
105
120
100
100
95
80
90
60
2008
2010
2012
2014
2016
EU21 = Euro area, Sweden, Denmark and United Kingdom.
Sources: National statistical authorities and Bank of Finland.
16.9.2014
Bank of Finland Bulletin 4/2014
Julkinen
13
Central banks’ measures in the crisis:
interim statement
How have our experiences from past crises helped?
• Aggressive interest rate cuts, partly joint measures
• Ensuring adequate liquidity
• Introduction of non-standard instruments
What has differed from historical experience?
• This has already been fixed:
– Banks’ capital and liquidity requirements, banking union
• This work is still in progress:
– ‘Too big to fail’: banking sector structural reform
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Bank of Finland Bulletin 4/2014
Julkinen
14
Euro area has experienced a double-dip
recession: GDP
Euro area
110
United States
Index, 2008/I=100
108
106
104
102
100
98
96
94
92
90
2008
2010
2012
2014
Source: Macrobond and the calculations by the Bank of Finland.
28107@BKT
16.9.2014
Bank of Finland Bulletin 4/2014
Julkinen
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Euro area has experienced a double-dip
recession: private non-residential investment
Euro area
110
United States
2008/I = 100
105
100
95
90
85
80
75
70
2008
2009
2010
2011
Sources: Macrobond and ECB.
2012
2013
2014
28108@
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Bank of Finland Bulletin 4/2014
Julkinen
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Euro area has experienced a double-dip
recession: unemployment rate
Euro area
14
United States
%
12
10
8
6
4
2
0
2008
2010
Source: Macrobond.
2012
2014
28107@Työttömyysaste
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Bank of Finland Bulletin 4/2014
Julkinen
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Differences in fiscal policy consolidation
smaller than thought…
Change in total fiscal deficit
Change in total fiscal deficit, euro area
4
Change in total fiscal deficit, United States
% of GDP
2
0
-2
-4
-6
-8
2007
2009
2011
2013
Source: IMF and calculations by the Bank of Finland.
2015
28107@dFipoYht
16.9.2014
Bank of Finland Bulletin 4/2014
Julkinen
18
Differences in fiscal policy consolidation
smaller than thought…
Change in structural fiscal deficit
Change in structural fiscal deficit, euro area
Change in structural fiscal deficit, United States
4
% of GDP
2
0
-2
-4
-6
-8
2007
2009
2011
2013
2015
Source: IMF and calculations by the Bank of Finland.
28107@dFipoRak
16.9.2014
Bank of Finland Bulletin 4/2014
Julkinen
19
… as the crisis spread to the euro area
via the overall level of interest rate
Euro area government bond yields to decline in early 2014
United States
18
Germany
France
Italy
Spain
%, 10-year government bond yields
16
14
12
10
8
6
4
2
0
2010
2011
2012
Loan maturities about 10 years.
Source: Bloomberg.
16.9.2014
Bank of Finland Bulletin 4/2014
2013
2014
Julkinen
20
… as the crisis spread to the euro area
via the overall level of interest rate
Euro area government bond yields to decline in early 2014
United States
18
Germany
France
Ireland
Italy
Portugal
Spain
%, 10-year government bond yields
16
14
12
10
8
6
4
2
0
2010
2011
2012
Loan maturities about 10 years.
Source: Bloomberg.
16.9.2014
Bank of Finland Bulletin 4/2014
2013
2014
Julkinen
21
Fiscal policy stance and outlook
• Stability and growth pact serving as an anchor of
confidence
– European Council announced that it will respect the pact
– Commission will report on the application of the EU
governance framework in December
• Major fiscal consolidation measures already in
place
– Negative growth impact will recede over the forecast horizon
• Juncker: EU-level investment package of EUR 300
billion
– Three-year plan on a scale of 1% of GDP per year
– Growth, employment, competitiveness
16.9.2014
Bank of Finland Bulletin 4/2014
Julkinen
22
Bank of Finland forecast:
GDP
United States
125
EU21
Japan
China (right-hand scale)
GDP: 2008/I = 100
GDP: 2008/I = 100
200
120
180
115
160
110
140
105
120
100
100
95
80
90
60
2008
2010
2012
2014
2016
EU21 = Euro area, Sweden, Denmark and United Kingdom.
Sources: National statistical authorities and Bank of Finland.
16.9.2014
Bank of Finland Bulletin 4/2014
Julkinen
23
Bank of Finland forecast:
inflation
EU21 inflation still sluggish
EU21*
5
United States
Japan
Finland
%
4
3
2
1
0
-1
-2
2010
2011
2012
2013
2014
2015
2016
*Euro area, United Kingdom, Sweden and Denmark.
Sources: National statistical authorities and Bank of Finland calculations.
16.9.2014
Bank of Finland Bulletin 4/2014
Julkinen
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Risk assessment:
outlook overshadowed by conflicts
• Serious crises in Europe and its environs
– North Africa and Middle East
– Ukraine and Russia
• Of key importance: human suffering
– Areas’ share of world GDP relatively small
– But not everything can be measured only in terms of GDP
• The question that is on everyone’s mind:
– How much will uncertainty hamper growth?
=> Risk calculations for the euro area and Finland
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Bank of Finland Bulletin 4/2014
Julkinen
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III. Economic policy facing big questions
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Bank of Finland Bulletin 4/2014
Julkinen
26
Growth has been subdued, with
forecasts promising no strong recovery
Questions raised in international debate:
1. Have the long-term growth prospects for
advanced economies weakened?
2. Are the growth prospects for the economy so
weak and inflation expectations so low that the
zero lower bound prevents the conduct of a
sufficiently accommodative monetary policy?
16.9.2014
Bank of Finland Bulletin 4/2014
Julkinen
27
Is GDP growth on a permanent
downward trajectory?
Annual GDP growth, OECD area
8
%
1960-1973
6
1974-2007
4
2010-2013
2
0
-2
-4
1960
1970
1980
1990
2000
Source: OECD and calculations by the Bank of Finland.
2010
28107@BKT_OECD
16.9.2014
Bank of Finland Bulletin 4/2014
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Factors underlying slow growth
Cyclical factors (temporary):
- Temporary fluctuations in demand
- Accumulation and reduction of debt
Structural (permanent):
- Functioning of the markets
- Declining size of working-age population
- Low level of investment
- Productivity growth
16.9.2014
Bank of Finland Bulletin 4/2014
Julkinen
29
How high can debt ratios climb?
350
Germany, public and private debt
Germany, public debt
United States, public and private debt
United States, public debt
% of GDP
300
250
200
150
100
50
0
1991
1996
2001
2006
Public debt: EMU debt, European Comission.
Private debt: Domestic credit to the private sector, World Bank.
Sources: European Comission and World Bank.
2011
28107@Velka
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Bank of Finland Bulletin 4/2014
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Real interest rates have fallen ever since the
1980s
10-year real interest rate
Germany
10
United States
%
8
6
4
2
0
-2
-4
-6
1960
1970
1980
1990
2000
2010
10-year government bond yield - actual consumer price inflation.
Source: OECD.
16.9.2014
28107@10v.reaalikorko
Bank of Finland Bulletin 4/2014
Julkinen
31
Economic Structures in 2008 and the impact
of the crisis on GDP
Change in real GDP, 2008–2013 (%)
10
Malta
5
Germany
Luxembourg
Austria
Estonia
Belgium
France
Netherlands
0
-5
Finland
Slovakia
Latvia
Ireland
-10
Portugal
Spain
Cyprus
Slovenia
Italy
-15
-20
Greece
-25
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
World Economic Forum (WEF) structural indicator 2008 (relative ranking)
The value of the WEF indicator is shown as relative ranking (0=top and 1=bottom) according to results for 2008.
Sources: Macrobond, World Economic Forum and Bank of Finland calculations.
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Bank of Finland Bulletin 4/2014
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Summary
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Bank of Finland Bulletin 4/2014
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Summary:
factors supporting euro area recovery
• Monetary policy exceptionally
accommodative
• Credit supply improved
• Euro depreciated in recent months
• Employment situation grown gradually better
• Fiscal policy no longer tightening
• Commodity prices lower than before
• Global economy recovering
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Bank of Finland Bulletin 4/2014
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34
Summary
Monetary policy and the global economy
I.
A sizeable package of monetary policy measures
formulated by the Governing Council of the ECB
- Reductions in interest rates
- Supporting financial intermediation
- Safeguarding price stability
II. Situation in the global economy deteriorated in the
summer
- Geopolitical risks hit the headlines
- Limited leeway for economic policy
III. Monetary policy alone cannot resolve the crisis
- All economic policy segments are needed
- Monetary policy, fiscal policy, structural policy
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Bank of Finland Bulletin 4/2014
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35
Risk assessment
Impact of uncertainty on
economic growth
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Bank of Finland Bulletin 4/2014
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Risk assessment:
impact of uncertainty on the economy
• Channels through which uncertainty affects the
economy:
– Postponement of investment decisions (corporations)
– Contingency saving (households)
– Higher risk premia (corporations, households and the
public sector)
• Measurement of uncertainty
– VSTOXX (implied volatility of stock prices)
– CISS (widespread uncertainty on the financial markets)
– Economic policy uncertainty indices, statistical surprises
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Bank of Finland Bulletin 4/2014
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Risk assessment:
measurement of uncertainty
CISS and VSTOXX indices and uncertainty shocks
5
Deviation from average relative to standard deviation
Lehman,
AIG, GSE
4
WorldCom &
Enron
3
2
9/11
Spain,
Italy
Northern
Rock
Russia & LTCM
default
Greece,
EFSF
1
Draghi’s
speech
0
-1
-2
99
00
01
02
03
04
05
06
07
VSTOXX index
08
09
10
11
12
13
14
CISS index
Source: Bank of Finland.
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Bank of Finland Bulletin 4/2014
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Risk assessment:
impact on euro area GDP
No monetary policy constraints
0,2
Monetary policy constrained
Difference in growth rate, % points
0
-0,2
-0,4
-0,6
-0,8
-1
-1,2
t+1
Source: Bank of Finland.
t+2
t+3
Shock in year t
28124 BKT1
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Bank of Finland Bulletin 4/2014
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Risk assessment:
impact on Finland’s GDP
0,2
Difference in growth rate, % points
0
-0,2
-0,4
-0,6
-0,8
-1
-1,2
t+1
Source: Bank of Finland.
t+2
t+3
Shock in year t
28124 Suomi
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Bank of Finland Bulletin 4/2014
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40
Bank of Finland forecast for
the global economy
GDP
2013
2014e
2015e
2016e
United States
2,2
EU21
0,0
Japan
1,5
China
7,7
Russia
1,3
World
3,1
2,1
2,8
1,1
1,4
1,1
1,3
7,0
7,0
0,0
0,5
3,2
3,5
3,1
3,1
1,6
1,6
1,2
1,2
7,0
7,0
0,5
1,0
3,7
3,7
3,1
3,1
1,9
1,7
1,2
1,1
6,0
6,0
1,5
2,0
3,7
3,7
World trade
3,2
3,9
4,8
5,1
5,4
5,4
5,5
% change from previous year. Previous forecast underneath.
EU21 = Euro area, Sweden, Denmark and United Kingdom.
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Bank of Finland Bulletin 4/2014
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Thank you!
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Bank of Finland Bulletin 4/2014
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