Euro area economic developments from monetary policy maker s perspective Member of Executive Board
Structure of the presentation: 1. Where do we come from? ECB s monetary policy set up and main reactions to the financial and economic crisis 2. Where do we stand now? current economic situation in the euro area 3. Where are we heading? ECB s recent monetary policy decisions
ECB monetary policy in brief
ECB monetary policy strategy Primary objective: maintenance of the price stability; Price stability defined as year-on-year increases in Harmonized Index of Consumer Prices (HICP) and quantified as: maintain inflation rates below but close to 2% over the medium term
Track record: euro area price developments (1999 -) 5 Annual percentage change in HICP (lifetime) average of HICP inflation 4 3 2 1 0-1
Policy and market rates 6 5 deposit rate 1mo EURIBOR main refinancing rate marginal lending rate Percentage points 4 3 2 1 0 2006 2007 2008 2009 2010 2011 2012 2013 2014-1 Source: Bloomberg.
Phases of the European financial market crisis
ECB s main reactions to the Systemic Crisis and Great Recession Unlimitted supply of central bank money (agaist eligible collateral) full allotment in fixed-rate operations (also in USD operations) refinancing maturities were extended up to 1 year A series of cuts in the ECB policy rates
Market s response to ECB s strong easing of monetary policy % 6 5 1mo euribor 12mo euribor main refinancing rate full allotment policy takes care of the money market risk premia 4 3 A series of rate cuts brings the interest rates lower than ever before 2 1 Final step with unlimited supply of 1year credit 0 01/2006 01/2007 01/2008 01/2009 01/2010 01/2011 01/2012 01/2013 Source: Bloomberg.
Sovereign debt crisis (2010-?) Strong divergence in economic and fiscal developments among euro area countries Sovereign risk started to disturb monetary policy transmission (sovereign/bank -nexus) Fragmentation of the financial markets Contagion spreading from one country to another
Re-emergence of large interest rate differentials that the single currency had brought down Euro area Germany Finland Ireland Greece 15 % 13 11 9 7 5 3 ECB s main reaction: Securities Market Programme (SMP) 1-1 1995 2000 2005 2010 Source: Bloomberg. 10 year sovereign yields. 23162@EA-korkoja2(en)
% 3,0 European confidence crisis Spread between German and average euro area 10 sovereign bond yields 2,5 2,0 1,5 1,0 Contagion: crisis spread from one country to another (Greece, Ireland, Portugal) when Italy and Spain were affected, the existence of the single currency was questioned 0,5 0,0 01/2008 01/2009 01/2010 01/2011 01/2012 01/2013 01/2014 Source: Bloomberg, Bank of Finland calculations.
Reactions to the confidence crisis Unlimited 3 year refinancing to the banks Outright Monetary Transactions (OMT) Eurogroup summit agreed on the banking union: Single Supervisory Mechanism (SSM) is being created, and will be fully operational under the ECB s umbrella in 2014 Single Resolution Mechanism (SRM) is being created as an independent EU body
whatever it takes President Draghi s Lancaster House speech in London, July 2012: Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough. In August 2012, the ECB Governing Council: ECB is ready undertake outright monetary transactions (OMT) in secondary sovereign bond markets (n.b. conditionality)
% Impact of the OMT: Euro area average German 10 year sovereign yield 3,0 2,5 2,0 1,5 1,0 0,5 0,0 01/2008 01/2009 01/2010 01/2011 01/2012 01/2013 01/2014 Source: Bloomberg, Bank of Finland calculations.
Where do we stand now: are we finished with the crisis?
Sovereign 10 year yield differentials back to levels last seen before the debt crisis % 6 Germany Euro area weighted average (excl. Greece) 5 4 3 2 1 0 2008 2009 2010 2011 2012 2013 2014 Source: Bloomberg, Bank of Finland calculations.
Euro area experiencing a double-dip recession: GDP developments Euro area United States 110 Index, 2008/I=100 28107 108 106 104 102 100 98 96 94 92 90 2008 2010 2012 2014 Source: Macrobond and the calculations by the Bank of Finland.
Double-dip recession visible also in unemployment figures 14 % Euro area United States 12 10 8 6 4 2 0 28107 2008 2010 2012 2014 Source: Macrobond.
Pace of recovery still differs between countries High-rated countries* GIIPS** 105 GDP: 2008/I = 100 100 95 90 85 2008 2009 2010 2011 2012 2013 2014 * Germany, France, Netherlands, Belgium, Finland and Austria. ** Greece, Ireland, Italy, Portugal and Spain. Sources: National statistical authorities, Eurostat and Bank of Finland calculations.
GIIPS -countries gaining competitiveness: developments in unit labor cost High-rated countries* GIIPS** euro area 150 2000 = 100 140 130 120 110 100 90 2000 2004 2008 2012 * Germany, France, Netherlands, Belgium, Austria and Finland. ** Greece, Ireland, Italy, Portugal and Spain. Source: Eurostat. 27248@ULC
External balances are improving widely 6 Current account High-rated countries* GIIPS** Euro area Four-quarter moving average, % of GDP 4 2 0-2 -4-6 -8 2008 2009 2010 2011 2012 2013 2014 * Germany, France, Netherlands, Belgium, Austria and Finland. ** Greece, Italy, Ireland, Portugal and Spain. Sources: ECB, Eurostat, national central banks/statistical authorities and Bank of Finland calculations. 26295@Chart23 (e) (2)
While public deficits are shrinking Public deficit Greece Spain Italy Portugal Euroarea 4 2 0-2 -4-6 -8-10 -12-14 -16-18 % of GDP 2000 2002 2004 2006 2008 2010 2012 2014 2000-2012 actual outcomes; 2013-2015 European Commission Autumn forecast 2013. Source: European Commission
public debt ratios remain high Public debt 130 High-rated countries* GIIPS** Euro area % of GDP 120 110 100 90 80 70 60 50 2000 2002 2004 2006 2008 2010 2012 2014 2000-2013 actual outcomes; 2014-2015 European Comission Spring Forecast 2014. * Germany, France, the Netherlands, Belgium, Austria and Finland. ** Greece, Ireland, Italy, Portugal and Spain. Sources: European Comission and Bank of Finland calculations.
Consumer confidence improved, but still relatively weak Consumer confidence indicators United States Japan Euro area (RHS) 100 Balance Balance 0 80-10 60-20 40-30 20 2008 2009 2010 2011 2012 2013 2014 Sources: European Comission and Bloomberg. 26586@Kotitalouksien luottamus (en) -40
Moderate future pick up forecast to production United States EU21 Japan China (right-hand scale) 125 120 115 110 105 100 95 90 GDP: 2008/I = 100 GDP: 2008/I = 100 2008 2010 2012 2014 2016 EU21 = Euro area, Sweden, Denmark and United Kingdom. Sources: National statistical authorities and Bank of Finland. 200 180 160 140 120 100 80 60
Concluding on current monetary policy The environment in which euro area monetary policy is implemented is still challenging: Inflation is and will be subdued, with the slack in the economy, Lower inflation increases real rates, when nominal rates have reached zero lower bound, Monetary policy transmission is still uneven in the euro area.
Output gap: 8 Output gap in United States and euro area remains negative United States Euro area Japan Finland % of GDP 6 4 2 0-2 -4-6 -8 2000 2005 2010 Figures for 2014 are WEO forecasts from October 2014. Source: IMF.
Inflation expectations moving down: 3,0 Inflation expectations in the euro area Market expectations, 5y/5y Market expectations, 3y/3y SPF-survey Market expectations, 1y/1y % 2,5 2,0 1,5 1,0 0,5 2007 2008 2009 2010 2011 2012 2013 2014 Inflation expectations are based on 5 year inflation swaps. 3-day moving averages. SPF-survey 5 years ahead. Sources: Bloomberg, ECB and Bank of Finland calculations. 25882@eur_odotukset_531SPF
Euro area and German real interest rates 3 2,5 2 1,5 1 0,5 0-0,5-1 -1,5-2 % Euro area* German** 2005 2007 2009 2011 2013 * Euro area 10ysovereign yield - euro area 10y inflation swap. ** German 10y sovereign yield - German 10y inflation swap. Source: Bloomberg and Reuters. 26586@Chart85
7 6 5 4 3 2 1 % New corporate loans, average interest rate High-rated countries GIIPS** Euro area 0 2005 2007 2009 2011 2013 * Germany, France, Netherlands, Belgium, Austria and Finland ** Greece, Ireland, Italy, Portugal and Spain. Source: ECB. 27255@Yrit.lainakorot_AAA_GIIPS
ECB s monetary policy decisions from June and September 2014 1. Policy steering rates lowered to the lower bound main refinancing rate 0.05%, deposit rate -0.20 2. Banks refinancing guarantee extended further full allotment procedure will be applied at least until the end of 2016, 3. Banks are provided with a series of targeted longer term funding at fixed rate (TLTRO), 4. An ABS purchase programme will be started later this year, 5. Covered bond purchases will be reactivated (CBPP3), and the Asset Quality Review is being finalized.
Divergence between European and US monetary policy cycles 1,2 1 0,8 0,6 0,4 0,2 0 % United States (fed funds, year-on-year) Euro area (Eonia, year-on-year) -0,2 01/2014 03/2014 05/2014 07/2014 09/2014 Source: Bloomberg. 27728@e1en
which is also visible in the FX rates 1,42 1,40 1,38 1,36 1,34 1,32 1,30 EURUSD (left-hand scale) Effective exchange rate of the euro (EER-20) (right-hand scale) EURUSD Index 106 105 104 103 102 101 100 1,28 99 01/2014 03/2014 05/2014 07/2014 09/2014 Source: Bloomberg. 27728@e2
Is GDP growth on a permanent downward trajectory? Annual GDP growth, OECD area 8 6 % 1960-1973 1974-2007 4 2010-2013 2 0-2 -4 1960 1970 1980 1990 2000 2010 28107 Source: OECD and calculations by the Bank of Finland.
Real interest rates have fallen ever since the 1980s 10-year real interest rate 10 8 6 4 2 0-2 -4 % Germany United States -6 28107 1960 1970 1980 1990 2000 2010 10-year government bond yield - actual consumer price inflation. Source: OECD.
The final question: Is the driving force behind our developments after all
demographics? Working-age population shrinking in Europe and Japan Japan Europe 600 Million 15 64-year-olds 500 400 300 200 100 0 1950 1970 1990 2010 2030 2050 Source: UN.
demographics? Working-age population shrinking in Europe and Japan Japan Europe 200 Normalized 1950=100 180 160 140 120 100 80 1950 1970 1990 2010 2030 2050 Source: UN.
Thank you!
Central Bank balance sheets FED BOJ ECB BOE 60 % of GDP 50 40 30 20 10 0 2008 2009 2010 2011 2012 2013 2014 Sources: National statistical authorities, Eurostat ja Bloomberg. 27875@KP_taseet (en)