Bank of Finland predicts slower growth and rising inflation

Governor Liikanen says overall outlook still positive

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The Bank of Finland predicts that economic growth in Finland will be slower, and inflation will increase in Finland over the next two years.
      Although growth in Finland and around the world is to slow down, Bank of Finland Governor Erkki Liikanen noted that the overall economic outlook remains positive for Finland. Speaking at a press conference on Monday for the publication of the bank's fresh economic review, Liikanen also said that next year's spurt of inflation will be temporary.
      Liikanen also said that economic prospects could take a downturn if the volatility that emerged on financial markets in August continues and grows stronger.
     
The Bank of Finland forecast assumes that the volatility will prove to be a relatively contained event.
      In September Liikanen said that a return to normal on the markets will take months.
      He added that banks and financial institutions now face a big task when they value their investments in relation with the new market prices.
     
Erkki Liikanen belongs to the council which decides on monetary policy at the European Central Bank.
      When it met in Vienna last Thursday, it left the ECB's benchmark interest rate at exactly one per cent, and gave no indication about coming trends in monetary policy.
      "We put forward a fairly meticulous point of view in our common statement, which was read by [ECB Director-General Jean-Claude] Trichet, and I have nothing to add to that", Liikanen said.
      Liikanen also avoided answering the question of whether or not the common European currency, the Euro, is overvalued with respect to the dollar.
      "As you know, we do not comment on exchange rates. Our main task is to secure price stability", Liikanen said.
     
The Bank of Finland predicts economic growth to reach 3.1 per cent next year and 2.5 per cent in 2009.
      Next year's forecast is for slower growth: the bank predicts growth of 4.4 per cent for this year.
      Factors behind the slowdown include weaker prospects abroad, and rising interest rates, which increase debt servicing costs of companies and consumers.
     
Growth in Finland is being slowed by rising wages, which weaken the competitiveness of Finnish production, as well as the increasing numbers of baby-boomers who will be retiring soon, Liikanen said.
      Although growth is slowing, unemployment is set to continue to decline. For the present year, the Bank of Finland forecasts an unemployment rate of 6.6 per cent, and for 2009, it should be 6.2 per cent.
     
Inflation is expected to reach 2.5 per cent next year, spurred by higher wages, as well as the rise in taxes on energy and alcoholic beverages.
      Liikanen expects inflation to ease in 2009 to less than two per cent. He also predicts that the rise in housing prices should slow down from the present six per cent annually to between two and three per cent.


Links:
  Bank of Finland press release October 8th, 2007

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