Monetary Policy in the Environment of Recovery: Experiences of Baltic Sea Region

Monetary Policy in the Environment of Recovery: Experiences of Baltic Sea Region M채rten Ross Suomen Pankki Warsaw, May 24th 2012

M채rten Ross

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND

Baltic Sea – monetary policy laboratory?

Free floaters: Sweden, Poland Managed floater: Russia Fixers: Denmark, Lithuania and Latvia Euro: Finland, Germany and Estonia

Märten Ross

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND

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Recovery was fairly strong in 2010-2011

Euro area 5 4 3 2 1 0 -1 -2 -3 -4 -5

USA

Japan

China*

Percentage change from previous quarter

2007 2008 2009 *Estimate by BOFIT. Sources: ECB, BEA and ESRI. M채rten Ross

2010

2011

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND

2012

3

Inflation pressures built up

Euro area 10

USA

Japan

China

Percentage change from previous year

8 6 4 2 0 -2 -4 2007 2008 2009 Sources: ECB and Bloomberg.

M채rten Ross

2010

2011

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND

2012

4

Eurosystem monetary policy has targeted its primary goal

ECB 7

Fed

BoJ

BoE

Riksbank

%

6 5

4 3 2 1 0

2000 Source: Bloomberg.

M채rten Ross

2005

2010

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND

5

Debt crisis complicates the picture

Germany Ireland %, 10 y

40

Finland Italy

France Portugal

Greece Spain

35 30 25 20 15 10 5 0

2008 2009 Source: Bloomberg.

M채rten Ross

2010

2011

2012

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND

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Problems in transmission mechanism were targeted via unconventional monetary policy Supplementary longer-term refinancing operations (36 mth) Fine-tuning operations (1-7 days) Net recourse to the standing facilities (overnight) Main refinancing operations (1 week) Supplementary longer-term refinancing operations (1-12 mth) Longer-term refinancing operations (3 mth)

1 500

EUR bn

1 000 500 0 -500 -1 000 -1 500 2009 2010 Source: Bank of Finland.

M채rten Ross

2011

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND

2012

7

Monetary policy in Euro area

Euroarea monetary policy has a clear mandate: price stability for the whole euro area – Despite challenging environment of the debt crisis monetary policy credibility has remained strong and inflation expectations stable – Country specific shocks and diverging policies can affect shortterm developments, but diversity per se is not a problem – ’Optimality’ of common monetary policy in the long run depends very much on the member states themselves as wrong policies by them can evolve into big structural problems.

Märten Ross

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND

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In any bigger currency area one faces some level of divergence Spain

Italy

France

Germany

Percentage change from previous year 6 5 4 3 2 1 0 -1 -2

2007 2008 Source: Eurostat.

M채rten Ross

2009

2010

2011

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND

2012

9

Price stability achieved also in Finland

Euro area 5

Finland

%, HICP

4 3

2 1 0 -1 2007 2008 2009 2010 2011 Sources: European Central Bank and Statistics Finland.

M채rten Ross

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND

2012

10

Data on inflation expectations support the perception of price stability being achieved

4

Euro area %, 2Y inflation swaps

USA

3 2 1

0 -1 -2

-3 -4 2007 2008 Source: Reuters.

M채rten Ross

2009

2010

2011

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND

2012

11

Thank you!

M채rten Ross

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND

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