Slower economic growth has led to a change in the monetary policy environment and lower interest rates globally. The document discusses how growth in working-age populations and labor productivity have slowed in advanced economies, causing a decline in potential output growth and the natural rate of interest. Central banks have responded by lowering policy rates and implementing accommodative monetary policies like quantitative easing. For the Eurozone, the ECB has kept rates low and expanded its asset purchase program. Banks' financial positions have improved as lending has recovered in the Euro area amid low interest rates on corporate loans. There was significant public debate over the summer of 2016 about challenges of secular stagnation and appropriate monetary policy responses.

1. Unrestricted
Suomen Pankki
Slower growth has affected
the monetary policy
environment and interest rates
Bank of Finland Bulletin 4/2016
Erkki Liikanen
29.9.2016 1

2. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
Contents of the presentation
1. Slower growth has affected the monetary policy
environment and interest rates
2. ECB monetary policy accommodative
– Banks’ situation has improved and lending
recovered
3. A great deal of public discussion on monetary
policy in summer 2016
29.9.2016 Erkki Liikanen 2

3. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
Slower growth has affected the
monetary policy environment and
interest rates
29.9.2016 Erkki Liikanen 3

4. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
Growth in working-age population has
slowed in advanced economies
29.9.2016 4Erkki Liikanen

5. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
-2
0
2
4
6
8
10
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
Germany France United Kingdom
United States Japan Finland
Annual change in labour productivity*, 5-year moving average, %
*) Output per hour worked.
Source: Conference Board.
Growth in labour productivity has slowed in
advanced economies
29.9.2016 5Erkki Liikanen
1
2
3

6. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
Long-term real interest rates have
declined worldwide
29.9.2016 6Erkki Liikanen
-4
-2
0
2
4
6
8
10
12
1985 1990 1995 2000 2005 2010 2015
Germany France United Kingdom
United States Japan Finland
Real* yield on 10-year government bond, %
*) Difference between nominal interest rate and actual 12-month inflation rate.
Sources: Macrobond and OECD.
33899

7. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
Natural rate of interest has decreased
(*)
 Natural rate of interest = the real interest rate that prevails
when the output of the economy is at its potential level and
price developments are stable
 The natural rate of interest has decreased in advanced
economies as the expected growth of potential output has
declined
– Space for normal monetary policy has diminished
 If monetary policy is to support the economy, the policy rate
must be below the natural rate of interest and, if monetary
tightening is desired, the policy rate must be above the
natural rate of interest.
(*) See. Houston, Laubach & Williams, FRBSF Wp. 2016-11, Lauri Vilmi, E&t
4/2016).
29.9.2016 7Erkki Liikanen

8. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
Central banks have lowered their policy
rates
29.9.2016 8Erkki Liikanen

9. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
Real deposit rates have varied
29.9.2016 9Erkki Liikanen

10. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
ECB monetary policy accommodative
 Governing Council of the ECB kept key decisions
unchanged at its meeting on 8 September 2016
 Currently valid monetary policy measures
– Policy rates low (deposit facility interest rate -0.4%)
– Expanded asset purchase programme (EUR 1,740 billion until
March 2017)
– Targeted longer-term refinancing operations
– Corporate sector purchase programme
 Forward guidance
– Monetary policy to remain accommodative for an extended
period
1029.9.2016 Erkki Liikanen

11. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
Euro area sovereign bond yields low …
29.9.2016 Erkki Liikanen 11

12. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
… and corporate funding costs down
29.9.2016 Erkki Liikanen 12

13. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
Position of euro area banks’ improved
and lending recovered
29.9.2016 Erkki Liikanen 13

14. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
Contraction of banking sector assets
halted
29.9.2016 Erkki Liikanen 14
1
2
3 5
4

15. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
Banks’ capital adequacy improved
29.9.2016 Erkki Liikanen 15

16. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
Interest rates low on new corporate
loans…
29.9.2016 Erkki Liikanen 16

17. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
…and loan stocks growing
29.9.2016 Erkki Liikanen 17

18. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
A lot of public debate on monetary
policy in summer 2016
 Secular stagnation and its causes
 Impacts of slow growth and a lower natural rate
of interest
 Conduct of monetary policy in a new environment
– Are negative interest rates and extensive securities
purchases a permanent part of the monetary policy toolkit?
 Size of central bank balance sheet – is large balance
sheet permanent?
– Negative monetary policy rates – how low can they be cut
without significant adverse effects?
– Inflation target – should it be raised?
29.9.2016 18Erkki Liikanen

19. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
Notable contributions to the monetary
policy debate in summer 2016
Benoît Cœuré: Assessing the implications of negative interest
rates, New Haven, July 2016.
Benoît Cœuré: The ECB's operational framework in post-crisis
times, Jackson Hole, August 2016.
Ben S. Bernanke: The Fed’s shifting perspective on the
economy and its implications for monetary policy
Ben S. Bernanke: Modifying the Fed’s policy framework: Does
a higher inflation target beat negative interest rates?
James Bullard: A New Characterization of the U.S.
Macroeconomic and Monetary Policy Outlook, London, June
2016.
Mario Draghi: Delivering a symmetric mandate with
asymmetric tools: monetary policy in a context of low interest
rates, Vienna, June 016.
29.9.2016 19Erkki Liikanen

20. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
Notable contributions to the monetary policy
debate in summer 2016 (continued)
Stanley Fischer: Remarks on U.S. Economy, Aspen, August
2016.
Robin Greenwood, Samuel G. Hanson and Jeremy C. Stein:
The Federal Reserve’s Balance Sheet as a Financial-Stability
Tool, Jackson Hole, August 2016
David Reifschneider: Gauging the Ability of the FOMC to
Respond to Future Recessions, Finance and Economics
Discussion Series 2016-068.
Lawrence H. Summers: The Age of Secular Stagnation,
Foreign Affairs. Mar/Apr 2016.
Janet L. Yellen: The Federal Reserve’s Monetary Policy
Toolkit: Past, Present, and Future, Jackson Hole, August 2016.
John C. Williams: Monetary Policy in a Low R-star World,
FRBSF Economic Letter, August 2016.
29.9.2016 20Erkki Liikanen

21. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
Thank you!
29.9.2016 Erkki Liikanen 21