Economic crises have expanded the frontiers of monetary policy implementation
The normal functioning of the economy hinges on smooth financial intermediation. During economic crises the flow of finance risks being impeded by uncertainty, and the central bank's role as a guarantor of financial intermediation is emphasised. The operations of euro area central banks already underwent change during the global financial crisis and the European sovereign debt crisis, as the scope for monetary policy implementation was expanded. New instruments comprised targeted longer-term loans to banks, large-scale asset purchases, and forward guidance. ‘Crisis situations emphasise the benefits of cooperation. As part of the euro area, Finnish banks and financial markets have access to the same funding channels at similar requirements as other entities in the area,’ stated Dr Tuomas Välimäki, Member of the Board of the Bank of Finland.
The onset of coronavirus pandemic in the spring of 2020 has prompted the Eurosystem to further explore the implementation of monetary policy in ways that have mitigated economic decline and market turbulence. ‘In crisis situations it is the task of the central bank to act decisively to safeguard price stability and to enhance growth and employment,’ stressed Dr Välimäki.
By purchasing assets, the Eurosystem increases the amount of liquidity in the financial system and lowers interest rates in bond markets. This eases financing costs for firms, banks, sovereigns and, ultimately, households. This is currently required by the weak outlook for economic activity and inflation. The Bank of Finland has purchased EUR 57 billion of assets through monetary policy operations. Out of the total, almost EUR 30 billion are assets purchased under the public sector purchase programme. In addition, slightly over EUR 7 billion worth of assets have been purchased under the pandemic emergency purchase programme. The majority of the assets purchased under both programmes are Finnish sovereign bonds. Under these programmes the Eurosystem's national central banks purchase bonds issued by their domestic sovereigns and assume any associated risk.
Financing conditions have also been eased with liquidity provision to banks operating in Finland. In response to the coronavirus pandemic, the Eurosystem further lowered the interest rates on its targeted loans in the spring. ‘By offering central bank funding at exceptionally affordable rates we are able to facilitate bank lending to Finnish businesses and households during the pandemic. Banks’ take-up of central bank funding has been record-high,’ noted Dr Välimäki.
Central bank collateral policy is aimed at supporting the objectives of monetary policy, financial stability and the functioning of markets. By easing its collateral requirements during the coronavirus pandemic, the Eurosystem has ensured that banks continue lending to the real economy. ‘Guaranteeing the sufficiency of collateral enables banks to make full use of the Eurosystem's long-term and low-interest rate refinancing operations. In addition to the common Eurosystem collateral easing measures, the Bank of Finland will adopt its own additional credit claim framework as from September 2020. This will support continued bank lending especially to firms that have been buffeted by the pandemic,’ stated Dr Välimäki.
In the early stages of the coronavirus pandemic the Bank of Finland also supported financial intermediation with its investment activities. The central bank's purchases of commercial paper were able to stabilise these domestic markets in an environment where other investors had retreated. ‘The Bank of Finland's purchases of domestic commercial paper helped in stabilising market activity and eased the pressure put on bank lending to firms,’ noted Dr Välimäki.