Sharp focus needed on Finnish economy’s growth prospects even during a crisis

Russia’s illegal and brutal war in Ukraine fundamentally transformed the Bank of Finland’s operating environment in 2022: the economic outlook darkened, inflation climbed to an exceptionally high level and consumers’ purchasing power declined. On the brighter side, the job market remained strong. The research and analytical work of the Bank and its Institute for Emerging Economies (BOFIT) was in high demand due to the need for evaluations of the economic impact of the crisis.

It is the people of Ukraine who are having to pay the highest price, and the human suffering is immense. Ukraine is fighting for freedom, democracy and European values. It needs our full support.

Europe was faced with a major challenge: how could it cope with the energy crisis sparked by the war. Thanks to joint decisions and national solutions it has proven possible to moderate the impact of the energy crisis. The private sector has also managed to seek out new ways to accelerate the green transition in energy.

In the ECB Governing Council, we began to raise interest rates in July, with the aim of stabilising inflation at 2% over the medium term. Policy rates were raised in 2022 by altogether 2.5 percentage points, bringing the deposit rate to 2% by the end of the year. As a consequence, there was a considerable rise in Euribor rates. A further element in the process of normalising monetary policy was the ending of net purchases under the extensive APP and pandemic-related asset purchase programmes. 

By tightening monetary policy, the aim is to avoid the emergence of an upward spiral in consumer prices and wages. Such a wage-price spiral would be a sign that inflation expectations have become de-anchored. If expectations are no longer anchored, then achievement of the inflation target will be at greater cost to the real economy in the longer term, because it would lead to tighter monetary policy and slower growth in the economy.

The threat assessment of cyber and hybrid attacks grew gloomier after Russia began its war in Ukraine. The Bank of Finland and other public authorities together prepared backup systems aimed at protecting the ability to make everyday payments in Finland under all circumstances.

We played our part in ensuring that payment systems function and people can trust them. Cash is important for the inclusion of all citizens, which is essential in a payment system malfunction. 

A central bank digital currency, or digital euro for the euro area, is seen as a way of preparing for the changes in the operating environment brought by digitalisation. For the purposes of this project, the Bank of Finland established in 2022 a monitoring group, which includes representatives of payment service providers and banks.

Among the challenges faced by Finland, the public finances is an area that cannot be ignored. In Finland, we have a fairly sound welfare state, but the economy is currently too small to carry it. Fiscal sustainability should not be just one goal among many, but an essential requirement for the long-term development of society.

Besides focusing on debt sustainability, the conditions for sustainable growth should also be nurtured. Population ageing and the weak productivity trend are eroding the longer term growth outlook for the Finnish economy. Investment in education and in research and innovation are also needed, as well as more education-based and work-based immigration.

Climate change and biodiversity loss are no longer challenges for the future alone, as their impact is already visible. The greening of monetary policy took a step forward with the ECB Governing Council’s plan, approved in 2021.

The Bank of Finland, as part of the Eurosystem, began to tilt bond purchases towards corporates with a better climate performance.

The Bank of Finland was involved in further developing climate statistics and assessment indicators of climate impacts, for use by central banks. Having reliable data is an effective way of preventing greenwashing.

Finland is, for the most part, a resilient society, and in difficult times people in Finland work together and in a responsible manner. Finland is well placed to stop its economy from languishing and not only to cope but to thrive.

The Bank of Finland played its part strongly in fostering stability in the economy in 2022.

Last but not least, a sincere thank you to all staff and the Bank’s partners for your valuable work during the year, for the benefit of Finland and the whole of Europe.