Governor Erkki Liikanen Bank of Finland
Monetary Policy Global Interdependence Center Central Banking Series: Helsinki June 6, 2016 at House of the Estates
6.6.2016
1
Growth and inflation outlook in the euro area
6.6.2016
Governor Erkki Liikanen
Suomen Pankki – Finlands Bank – Bank of Finland
2
The uncertainties are in part economic … Europe Risk of deflation?
Oil and other commodities Price developments
United States Gradual normalisation of monetary policy?
China Slowing of economic growth and structural change Emerging economies Condition of balance sheets Commodity prices
6.6.2016
Governor Erkki Liikanen
Suomen Pankki – Finlands Bank – Bank of Finland
3
… but it is difficult to assess the economic importance of some risks Europe BREXIT Refugee situation
Near East Geopolitical risks
Global Consequences of climate change
United States and Europe Opposition to free trade Risk of introversion 6.6.2016
Governor Erkki Liikanen
Suomen Pankki – Finlands Bank – Bank of Finland
4
GDP recovery broad-based in the euro area
4
Euro area USA % change from previous year
Japan
China, (right scale) 8
3 6 2 1
4
0 2 -1 -2
0
2012 2013 2014 2015 2016 2017 Sources: Eurostat, ECB and OECD. Euro area ECB BMPE June 2016 projection. USA, Japan, China OECD June 2016 forecast. 32709 6.6.2016
Governor Erkki Liikanen
Suomen Pankki – Finlands Bank – Bank of Finland
5
But consumer price inflation still subdued Euro area consumer price inflation (HICP) Inflation
Underlying inflation*
5 % 4 3 2 1 0 -1 1999
2004
2009
2014
* Underlying inflation = inflation excluding energy, food, alcohol and tobacco. Sources: ECB and Bank of Finland. 32120@Chart8(EN) 6.6.2016
Governor Erkki Liikanen
Suomen Pankki – Finlands Bank – Bank of Finland
6
Long-term inflation expectations low in the euro area Market expectations, euro area SPF survey, euro area
Market expectations, USA SPF survey, USA
4 % 3.5 3 2.5 2 1.5 1 2009
2010
2011
2012
2013
2014
2015
2016
Sources: Bloomberg, ECB, Philadelphia Fed and Macrobond. Market expectations are based on 5-year and 10-year inflation-linked swap rates. The SPF survey horizon extends five years ahead. patu32422@infoodotus(ENG)
6.6.2016
Governor Erkki Liikanen
Suomen Pankki – Finlands Bank – Bank of Finland
7
Growth and inflation forecasts: Eurosystem macroeconomic projections, June 2016
(change from March 2016 ECB staff macroeconomic projections)
GDP: 2016: 1.6% (+0.2%) 2017: 1.7% ( - ) 2018: 1.7% (-0.1%)
Inflation: 2016: 0.2% (+0.1%) 2017: 1.3% ( - ) 2018: 1.6% ( - )
6.6.2016
Governor Erkki Liikanen
Suomen Pankki – Finlands Bank – Bank of Finland
8
Monetary policy exceptionally accommodative for a prolonged period
6.6.2016
Governor Erkki Liikanen
Suomen Pankki – Finlands Bank – Bank of Finland
9
Eurosystem non-standard monetary policy Outright Monetary Transactions (2012- ) Forward Guidance (2013- ) Targeted Long Term Refinancing Operations
6.6.2016
(2014-15 and 2016-17) Covered Bond Purchase Programme (2014- ) Asset Backed Securities Purchase Programme (2014- ) Public Sector Purchase Programme (2015-) Corporate Sector Purchase Programme (2016- )
Governor Erkki Liikanen
Suomen Pankki – Finlands Bank – Bank of Finland
10
An important new step was taken 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
• Forward guidance Purchases are intended to be carried out until end-September 2016 and will in any case be conducted until we see a sustained adjustment in the path of inflation consistent with our inflation aim.
6.6.2016
Governor Erkki Liikanen
Suomen Pankki – Finlands Bank – Bank of Finland
11
Monetary policy was further eased on 10 March 2016 with the adoption of a comprehensive monetary policy package.
6.6.2016
Governor Erkki Liikanen
Suomen Pankki – Finlands Bank – Bank of Finland
12
ECB Governing Council decisions in March 2016 Monetary policy rates were lowered – Key interest rate to 0.0% – Deposit facility rate to -0.40%
Monthly purchase volumes in the expanded asset purchase programme (EAPP) were expanded to €80 bn as of 1 April 2016 – Investment-grade bonds issued by non-banking-sector corporations included
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.
6.6.2016
Governor Erkki Liikanen
Suomen Pankki – Finlands Bank – Bank of Finland
13
Monthly purchase volumes increased from EUR 60 billion to EUR 80 billion
Asset-backed securities Public sector debt securities 2 000 EUR billion
Covered bonds
1 800 1 600 1 400 1 200 1 000 800 600 400 200 0 2015 2016 Sources: ECB and Macrobond.
2017
The dashed line shows target path announced in March, the dotted line shows the previous target path announced in December 2015. patu32422@EAPP2(2)
6.6.2016
Governor Erkki Liikanen
Suomen Pankki – Finlands Bank – Bank of Finland
14
ECB Governing Council on 2 June 2016 confirmed its 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 past the horizon of the asset purchases. 6.6.2016
Governor Erkki Liikanen
Suomen Pankki – Finlands Bank – Bank of Finland
15
ECB Governing Council on 2 June 2016
In the current context, it is crucial to ensure that the very low inflation environment does not become entrenched in second-round effects on wage and price setting.
The Governing Council will closely monitor the evolution of the outlook for price stability and, if warranted to achieve its objective, will act by using all the instruments available within its mandate.
6.6.2016
Governor Erkki Liikanen
Suomen Pankki – Finlands Bank – Bank of Finland
16
Monetary policy transmission channels
6.6.2016
Governor Erkki Liikanen
Suomen Pankki – Finlands Bank – Bank of Finland
17
A cut in monetary policy rates lowers short‐ term money market rates… %
. . .
Change in Eonia-futures after a cut in monetary policy rates
Expected short-term money market rate
Time
Present
6.6.2016
Governor Erkki Liikanen
Suomen Pankki – Finlands Bank – Bank of Finland
18
… forward guidance postpones expected tightening of monetary policy… % Change in Eonia-futures due to forward guidance
Expected short-term money market rate
2016
6.6.2016
Governor Erkki Liikanen
2017
2018
2019
Suomen Pankki – Finlands Bank – Bank of Finland
…
Time 19
… and asset purchases depress long‐ term interest rates %
Decline in long-term rate due to asset purchases
Expected short-term money market rate
2016
6.6.2016
Governor Erkki Liikanen
2017
2018
2019
Suomen Pankki – Finlands Bank – Bank of Finland
…
Time 20
Negative deposit rates The Governing Council of the ECB introduced negative deposit rate in June 2014, with three further reductions in September 2014, December 2015 and March of this year. – In March the deposit rate was lowered to -0,4 %.
The main objectives of this measure are twofold: – to further lower money market rates and the longer end of the yield curve via expectations effects – to increase the velocity of circulation of excess reserves in the interbank market towards banks that need liquidity to sustain or expand their credit portfolios
6.6.2016
Governor Erkki Liikanen
Suomen Pankki – Finlands Bank – Bank of Finland
21
Channels of influence of a more accommodative monetary policy Lowers real interest rates and eases financial conditions in the economy − interest rates at the longer end decline, financial 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 profitability of investments increase − external value of the euro depreciates
6.6.2016
Governor Erkki Liikanen
Suomen Pankki – Finlands Bank – Bank of Finland
22
Euro area sovereign bond yields at low levels Germany
Euro area average sovereign bond yield
6 % 5 4 3 2 1 0 2008
2009
2010
2011
2012
2013
2014
2015
2016
10-year sovereign bond yield. Source: Macrobond. patu32422@pitkätkorot
6.6.2016
Governor Erkki Liikanen
Suomen Pankki – Finlands Bank – Bank of Finland
23
Bank lending rates on household and corporate loans have decreased 3-month Euribor Average interest rate on new household loans Average interest rate on new corporate loans 7 % 6 5 4 3 2 1 0 -1 2003 2006 2009 Sources: ECB and Macrobond.
2012
2015
32422@antolainakorot (sv)
6.6.2016
Governor Erkki Liikanen
Suomen Pankki – Finlands Bank – Bank of Finland
24
Growth in bank loans has accelerated Annual growth in loan stocks Corporate loan stock 3
Household loan stock
% change from previous year
2 1 0 -1 -2 -3 -4 2010
2011
2012
2013
2014
2015
2016
Loan stocks adjusted for balance sheet transfers and securitisation. Sources: ECB and Macrobond. patu32422@lainakannat(sv)
6.6.2016
Governor Erkki Liikanen
Suomen Pankki – Finlands Bank – Bank of Finland
25
Corporate bond spreads have declined
6.6.2016
Governor Erkki Liikanen
Suomen Pankki – Finlands Bank – Bank of Finland
26
On the Banking Union and the new responsibilities of the ECB
6.6.2016
Governor Erkki Liikanen
Suomen Pankki – Finlands Bank – Bank of Finland
27
ECB’s role in the new supervisory architecture
European Central Bank (ECB) ECB/SSM Financial and economic stability
Governing Council Monetary Policy: Price Stability
Supervision of financial institutions
Macro-prudential Policy: Financial stability
European Systemic Risk Board (ESRB)
Bank Supervision: Solvency and resilience of individual banks
European Supervisory Authorities (EBA, ESMA, EIOPA)
EU
Euro area Sources: Smets (2013) and Bank of Finland.
6.6.2016
Governor Erkki Liikanen
Suomen Pankki – Finlands Bank – Bank of Finland
28
ECB´s monetary policy and bank supervision separated European Central Bank (ECB) Monetary policy Decisionmaking
Bank supervision
Governing Council
Supervisory Board
Executive Board
Directorates
Committees
(Draft decision)
Directorates
Working Groups
Preparation Working Groups
6.6.2016
Governor Erkki Liikanen
Colleges of Supervisors
Suomen Pankki – Finlands Bank – Bank of Finland
29
ECB reinforces but cannot substitute for national macroprudential policies in the euro area National macroprudential authorities bear the main responsibility for detecting systemic risks and taking appropriate macroprudential action
National macroprudential action should be timely, bold and intrusive
The ECB can reduce the inaction bias inherent in national macroprudential policies
European Systemic Risk Board (ESRB) provides EU-level guidance to prevent and mitigate systemic risks
6.6.2016
Governor Erkki Liikanen
Suomen Pankki – Finlands Bank – Bank of Finland
30
European Systemic Risk Board (ESRB) oversees the EU financial system In response to the global financial crisis, the ESRB was established as a Union-level body to prevent and mitigate systemic risks
The ESRB monitors and assesses systemic risks, collecting views of both central bankers and supervisory authorities
To pursue its macroprudential mandate, the ESRB may issue risk warnings and policy recommendations
6.6.2016
Governor Erkki Liikanen
Suomen Pankki – Finlands Bank – Bank of Finland
31
Two main groups of macroprudential tools 1) Tools directed (mainly) at financial institutions: – Countercyclical Capital Buffer – Capital buffers for Systemically Important Financial Institutions
2) ”Borrower-based tools”: tools directed (mainly) at borrowers and terms and conditions of loans: – Loan-to-value cap , Loan-to-income cap, Debt-serviceto-income cap, Amortisation requirements,…
In several countries, borrower-based tools automatically apply to loans made by branches of foreign banks
6.6.2016
Governor Erkki Liikanen
Suomen Pankki – Finlands Bank – Bank of Finland
32
New financial regulatory architecture and monetary policy transmission
6.6.2016
Governor Erkki Liikanen
Suomen Pankki – Finlands Bank – Bank of Finland
33
The mandate of the ECB Maintaining price stability is the primary objective of the ECB.
Without prejudice to price stability, the ECB shall support the general economic policies in the EU, including balanced economic growth.
Financial stability is key to realizing this mandate.
The SSM regulation assigns macroprudential responsibilities to the ECB, with power to apply tighter macroprudential requirements than the designated national macroprudential authorities. 6.6.2016
Governor Erkki Liikanen
Suomen Pankki – Finlands Bank – Bank of Finland
34
New financial regulatory architecture and monetary policy transmission Monetary policy transmission more immune from disruption • Banks more resilient to future shocks • New macroprudential instruments designed to improve the stability of the financial system as a whole
Interaction of micro- and macroprudential policy can enhance the effectiveness and efficiency of monetary policy • Effective regulation protects monetary policy from financial dominance
Euro area less vulnerable to fragmentation The SSM creates the conditions and incentives for deeper integration of the European banking market
6.6.2016
Governor Erkki Liikanen
Suomen Pankki – Finlands Bank – Bank of Finland
35
Thank you!
6.6.2016
Governor Erkki Liikanen
Suomen Pankki – Finlands Bank – Bank of Finland
36