Bank of Finland worried about continued growth in housing loans

Governor Liikanen sees level of household indebtedness as unsustainable in long run

Erkki Liikanen

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Inflation and increased borrowing by Finnish households are a cause of concern for the Bank of Finland.
      "The rate of inflation is being followed closely, but forecasts for positive development in the Finnish economy are not being changed", said the central bank’s governor Erkki Liikanen on Thursday at an event marking the release of the Bank of Finland’s publication Euro ja talous ("The Euro and the Economy").
     
Rising prices have already reduced risk-taking on the markets. The central banks of various countries are also preparing for greater risks.
      Liikanen is a member of the Council of the European Central Bank (ECB), which decided in early June to raise its key interest rate to 2.75 percent. He repeated almost verbatim what ECB President Jean-Claude Trichet said concerning economic and inflation prospects for the euro zone in connection with the interest rate hike.
      "The ECB will continue to act in the future as well, if an interest rate hike is needed. The present interest rate level still supports growth, but the risk of inflation is taken into consideration.
      According to a fresh report by Eurostat, the annual inflation rate in the euro countries was 2.5 percent in May, which is 0.5 percentage points higher than at the same time last year. The increase in April was 0.1 percentage points.
      Finland was at the lower end of the inflation figures, with a 1.7 percent annual inflation rate. Liikanen said that having the lowest inflation of the euro countries will be Finland’s goal in the future as well.
     
Increased indebtedness of households is another major concern for the Bank of Finland. Although the number of new housing loans has decreased somewhat, home sales remain at a high level.
      "Such a level of indebtedness is unsustainable in the long term. Because of the low level of interest rates, the consequences will not be apparent until later. Indebtedness will cause problems, if there are changes in family income", Liikanen predicted.
      Liikanen added that the Finnish economy has continued to develop in a positive direction, with growth increasing especially in the early part of the year.
      Companies and consumers have confidence in the economy, and both production and investments have grown. Liikanen says that while consumer prices have not increased significantly, the risk of inflation has grown considerably.
      The rising price of oil is the biggest factor spurring inflation. Forecasts for the price of oil have had to be altered many times, but Liikanen says that "economies have managed to absorb price alterations into their monetary policies surprisingly well".
     
Liikanen does not believe that the rise in the price of oil will lead to the kind of inflationary spiral that was seen in the 1970s.
      "The oil-dependence of economies has decreased, and confidence in central banks has increased. It has been possible to balance out the higher price of oil by moving industrial production to cheaper countries."
      However, there are signs of a change in direction.
      "It is a good question how long the prices in new industrial countries can decline. There are signs of a rise in prices in Thailand and the Philippines, for instance", said Bank of Finland Governor Erkki Liikanen.


Links:
  Bank of Finland website

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