Monetary policy

Statistics Finland publishes two consumer price indices. The national Consumer Price Index (CPI) describes the price development of goods and services purchased by households in Finland and is used as a general measure of inflation in Finland.

The calculation of the CPI takes into account interest rates on both housing loans and consumer credit. The CPI is the index that receives most attention in the domestic context, and many index-linked expenditure items are typically linked to it. The CPI is traditionally known as the cost-of-living index. This is a good description of the national CPI, as it broadly reflects the cost of living of households.

In the EU and the euro area, consumer price inflation is measured by the Harmonised Index of Consumer Prices (HICP). This is a slightly narrower and at the same time purer consumer price index than the national CPI, as it does not include interest rates on housing loans and consumer credits. It is harmonised because all the countries of the European Union use the same method. This ensures that data from one country can be compared with data from another.

Eurostat and national statistical institutes, such as Statistics Finland, compile the HICP according to harmonised statistical methods. The HICP is the measure used by the ECB to assess the achievement of the price stability objective for the euro area, and it is also the main indicator for the Bank of Finland’s domestic inflation monitoring.

Central banks seek to curb inflation for a number of reasons:

Maintaining purchasing power: High inflation weakens consumers’ purchasing power, as prices rise faster than wages. This means that people can buy fewer goods and services for the same money.

Economic stability: High and volatile inflation may lead to economic uncertainty and hinder economic planning. Businesses and consumers may be reluctant to make long-term investments if they are uncertain about future prices.

Competitiveness: Too high an inflation rate may weaken a country’s competitiveness by making its products and services more expensive than those of other countries. This may lead to a fall in exports and a deterioration in the trade balance.

Social reasons: High inflation may create social and political pressures because it particularly affects people on low incomes who are less able to adjust to rising prices. By maintaining stable and low inflation, central banks seek to create a predictable economic environment that supports sustainable economic growth and wellbeing.

The Eurosystem’s most important policy rate is currently the deposit rate. This rate determines the rate at which banks can deposit excess money with the central bank overnight. The deposit rate is an important policy instrument as it directly affects short-term market interest rates and interbank borrowing costs. It is central to the implementation of the Eurosystem’s monetary policy and controls inflation and economic activity in the euro area.

The economic outlook can be forecast for different periods of time, or forecast horizons. The Bank of Finland publishes annually two extensive forecasts and two more limited interim forecasts for the Finnish economy. They describe economic development in the current year and in the next 2–3 years.

In addition, the Bank of Finland publishes a continuously updated short-term forecast on its website, forecasting economic growth in the current quarter and the next 1–2 quarters. The long-term forecast, on the other hand, describes slow changes in the structures of the economy, even over several decades. The Bank of Finland's long-term forecast is typically updated every few years.

In preparing its economic forecasts, the Bank of Finland uses a wide range of statistical and economic models that describe the Finnish economy. The forecasting work makes extensive use of various statistical data and indicators that describe the development of the Finnish and international economy.

In addition to statistical analysis, forecasts are always based on the judgment and views of the experts who prepare them, as even the best forecasting models cannot take into account all the factors that influence economic development at any given time.