1. Bank of Finland
Back to the old normal?
Monetary policy implementation in a landscape of rising interest rates
and a shrinking Eurosystem balance sheet
Bank of Finland Bulletin press conference 29 August 2023
Board Member Tuomas Välimäki

2. | Public | BOF/FIN-FSA-UNRESTRICTED
Key messages
• Interest rates have returned to the focus of monetary policy
− ECB’s deposit facility rate the most important tool to steer rates.
• Eurosystem’s balance sheet contracting gradually and predictably
− ECB however stands ready to react to harmful market tensions.
• Now is the right time to weigh options for future monetary policy implementation
− How to take into account factors related to financial stability and climate change without
eroding the ability to steer interest rates?
29.8.2023 2

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Monetary policy environment coloured by crises
3
COVID-19
pandemic
Russia attacks
Ukraine
Inflation rises
sharply
Source: Bank of Finland.
29.8.2023
Global Financial
crisis
Global
recession
Euro area
sovereign debt
and confidence
crisis
Increased risk of
deflation
”lowflation”

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Inflation spiked above 10 %, receding slowly
29.8.2023 4
3,0
2,2
5,4
3,0
2,3
5,1
-2
0
2
4
6
8
10
12
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
HICP inflation Core inflation
HICP, ECB forecast Core inflation, ECB forecast
% change on previous year
Sources: Eurostat and ECB. 32426@YKHIkontrib(2)en

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Deposit facility rate has become the main instrument
for monetary policy
29.8.2023 5

6. | Public | BOF/FIN-FSA-UNRESTRICTED
ECB balance sheet expanded at the effective lower bound
and as a response to crises
29.8.2023 6

7. | Public | BOF/FIN-FSA-UNRESTRICTED
Eurosystem securities holdings are gradually decreasing
29.8.2023 7
0
1000
2000
3000
4000
5000
6000
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027
Eurosystem purchase programme holdings
APP PEPP APP expectations* PEPP expectations*
*Expectations are median expectations from the Survey of Monetary Analysts.
APP and PEPP do not include SMP, CBPP1 or CBPP2 programmes
Source: ECB
29.8.2023/ © Bank of Finland
EUR billion

8. | Public | BOF/FIN-FSA-UNRESTRICTED
Central bank credit operations have returned to pre-
pandemic levels
29.8.2023 8

9. | Public | BOF/FIN-FSA-UNRESTRICTED
Rate hikes have been transmitted well to money market rates
29.8.2023 9

10. | Public | BOF/FIN-FSA-UNRESTRICTED
The tightening of monetary policy has been transmitted
smoothly across the entire euro area
29.8.2023 10

11. | Public | BOF/FIN-FSA-UNRESTRICTED
Monetary policy implementation in the future
29.8.2023 11

12. | Public | BOF/FIN-FSA-UNRESTRICTED
Narrow interest rate corridor limits volatility in money
market rates
29.8.2023 12

13. | Public | BOF/FIN-FSA-UNRESTRICTED
Increase in liabilities may create a need for structural
operations
29.8.2023 13
Path of reserves
without new
structural operations

14. | Public | BOF/FIN-FSA-UNRESTRICTED
29.8.2023 14
Conclusions

15. bof.fi
Thank you!
e-mail: tuomas.valimaki@bof.fi
Twitter: @TuomasValimaki