Monetary policy has been relatively successful in bringing inflation down

The global political environment became more challenging in 2024. Russia’s illegal war in Ukraine continued, the Middle East conflict escalated and the new US administration was planning barriers to trade. All this was reflected in economic uncertainty.

There was also some good news: inflation slowed down, in line with the goal of the European Central Bank’s monetary policy. In 2024, inflation in the euro area was at 2.8% in January and 2.4% in December. Despite the earlier increases in interest rates, a recession was avoided in the euro area and employment continued to rise. The number of people employed in the euro area was about 7 million more in October 2024 than at the end of 2019. This signifies that monetary policy has been relatively successful in bringing inflation down without destructive costs to society.

In the ECB’s Governing Council we decided to begin lowering key interest rates in June. We lowered rates a total of four times during the year, bringing the key policy rate from 4% down to 3%. Lowering interest rates has reduced loan-servicing costs for Finnish businesses and households. In Finland, the interest rate cuts have been rapidly passed through to lending rates, as Finns favour loans that are tied to Euribor rates.

Finland’s financial system has remained stable due to a strong capital position and minor level of loan losses, although there has been a slight increase in the loan-servicing problems of households and businesses. There is nevertheless good reason to remain alert and analyse any vulnerabilities and risks. Such is the work of the European Systemic Risk Board, of which I am the First Vice-Chair.

The Finnish economy is returning slowly to growth. Despite the fall in interest rates, both businesses and households remained cautious in regard to major investments and borrowing. Household purchasing power nevertheless continued to pick up as inflation slowed and wages rose.

The message in the Bank of Finland’s assessment of the country’s public finances was clear: turning Finland’s debt ratio around will require sustained and focused fiscal rebalancing measures. It is also essential to concentrate on policy actions that support productivity improvements and aim at sustainable economic growth.

Much depends on the solutions we adopt nationally. But we also need substantial joint efforts at European level, especially for strengthening the continent’s shared security and defence industry collaboration. The report submitted to the European Commission by former ECB President Mario Draghi provided a clear-sighted diagnosis of the reasons for low growth. The report sets a suitably high bar for the measures currently being formulated.

The escalation of geopolitical tensions has increasingly highlighted the need for stronger provision of European and Finnish payment services. Further progress towards instant payment was made in the form of collaborative work between the sector and the relevant authorities. Cash will remain alongside other forms of payment, and it also has its place in regard to payment during disruptive situations.

The Bank of Finland ensures that the payment and settlement systems used in Finland operate securely and efficiently. In 2024, banks were the target of exceptionally large cyberattacks, and Finland’s international communications networks were disrupted. Despite these events, systems functioned reliably on the whole. Preparedness in society is at a good level overall.

Finland has an abundance of skills and enterprise and is a genuinely caring society. We have what it takes to build prosperity in the years to come and in the decades beyond. But to do so, we must demonstrate a strong capacity for renewal and a readiness for mutual cooperation.

Last but not least, may I warmly thank all our staff and stakeholders for their fruitful input in 2024.

February 2025

Olli Rehn
Governor
Bank of Finland