BANK OF FINLAND ANNUAL REPORT 1998 The figures in the Annual Report are based on data available in February 1999. ISSN 1239-9345 (print) ISSN 1456-579X (online) Vammalan Kirjapaino Oy Vammala 1999 Contents The Governor’s Review . .7 Preparation for EMU and Other Activities Monetary Policy . .11 Related to the European Union . .60 Inflation eased . .12 Preparation for Stage Three of Economic and Economic growth slowed . .14 Monetary Union . .60 Domestic demand became the driving force Historic decisions in May . .60 of growth . .14 Organization of the ECB . .61 Further fall in unemployment . .17 The ESCB is responsible for Fiscal position of the general government single monetary policy in the euro area . .62 sector improved . .17 Committees play a key role in preparatory work . .62 Monetary policy easy despite The Monetary Committee’s involvement in a small interest rate increase . .19 EMU preparations . .63 Finnish short-term interest rates among Economic policy cooperation with member states . .63 the lowest in the EU . .19 External representation of the euro area . .65 The markka stabilized within the ERM . .21 Monetary policy objectives and Onset of the Russian crisis caused turbulence in framework announced . .65 international financial markets . .24 Payment and settlement systems fully operational . .65 Key interest rates in the euro area countries Transfer of capital and foreign exchange converged in the latter part of the year . .26 reserves to the ECB . .66 Exchange rate movements between Transition period for the allocation of the major currencies were volatile . .27 monetary income . .67 Conversion rates adopted . .28 Harmonization of NCBs’ accounting principles . .67 External balance, bank lending and the money supply . .28 The position of the ESCB in financial supervision . .67 Current account surplus grew slightly . .28 EMU legislation completed before Rise in share prices weakened the end of the year . .68 the net international Production of euro banknotes and coins . .69 investment position . .28 Statistics for the EMU era . .69 Stock of bank lending grew substantially . .30 Major changes in data systems . .71 Money growth remained moderate . .31 Changeover weekend . .71 Preparations made for the European Central Bank’s ERM II arrangements . .71 monetary policy . .32 The Nordic agreement on foreign exchange support was revoked . .72 Financial Markets . .35 Cooperation in EU matters in Finland . .72 Structural change in the financial sector . .36 Banks . .36 Other International Cooperation . .73 Capital markets . .37 Bank for International Settlements . .73 Banks’ profitability and efficiency . .38 International Monetary Fund . .73 The stock market, mutual funds and derivatives markets . .40 Technical assistance . .75 Financial supervision and legislation . .42 Other international activities . .76 Payment Systems . .45 Reserve Assets . .77 Oversight of payment and settlement systems . .45 Provision of payment system services and Research, Statistics, Information and Publications . .79 development of the Bank of Finland’s real-time Economic analysis and research . .79 gross settlement system . .47 Research on economies in transition . .80 TARGET becomes operational . .50 Statistics and information services . .81 Other domestic systems . .51 Information technology . .82 Developments in legislation . .51 Information and publications . .82 Cooperation with banks . .52 In-house Operations, Organization and Staff . .84 Maintenance of the Currency Supply . .54 Organization . .84 Upward trend in currency in circulation continued . .54 The Bank of Finland’s operating expenses Banknotes’ flow-through rate decreased . .56 and budget . .85 The number of counterfeit notes remained low . .58 Personnel . .86 Flow of coins continued to decrease . .58 Special projects . .86 The effects of the euro already visible . .59 Training . .87 ANNUAL REPORT 98 5 F i n a n c i a l S t a t e m e n t s . .88 C h a r t s Profit and loss account . .88 1.Consumer prices . .13 Balance sheet . .90 2.Level of earnings . .13 Appendices to the financial statements . .92 3.Structure of demand and supply . .15 Notes to the financial statements . .94 4.Private sector debt . .15 Accounting principles applied . .94 5.Economic performance in Finland and the EU . .16 Notes to the profit and loss account . .94 6.Number of employed and unemployment rate . .16 Notes to the balance sheet . .95 7.Cuts in central government outlays . .18 Auditors’report . .98 8.Public finances . .19 9.Key interest rates . .20 10.Differential between Finnish and German interest rates . .20 A p p e n d i c e s . .99 11.Central bank rates . .21 Measures concerning monetary and foreign 12.Markka’s external value . .22 exchange policy and the financial markets . .101 13.Bank of Finland’s operations in the money Main opinions issued by the Bank of Finland . .102 and foreign exchange markets . .23 Bank of Finland publications . .124 14.Bank of Finland’s foreign reserve assets . .24 Management and organization of 15.Euro country currencies:deviation from the Bank of Finland . .125 Deutschemark’s central parity . .24 16.Actual and expected 3-month interest rates . .25 17.Differential between 10-year yield in Germany and other Euro countries . .25 T a b l e s 18.Deutschemark and yen exchange rates 1.Monthly balance sheet of the Bank of Finland,1998 ..106 vis-à-vis US dollar . .27 2.Bank of Finland’s reserve assets and 19.Trade account and current account . .29 forward exchange position . .110 20.Net international investment position . .29 3.Markka’s exchange rate against the ECU and 21.Outstanding bank lending to companies the trade-weighted currency index . .110 and households . .30 4.Bank of Finland’s base rate . .110 22.Monetary aggregates . .30 5.Bank of Finland’s minimum reserve system . .111 23.Financial performance of deposit bank groups . .39 6.Bank of Finland’s standing facilities . .111 24.Deposit bank groups:non-performing assets 7.Domestic interest rates . .112 and loan losses . .39 8.Bank of Finland’s money market operations . .112 25.Markka-denominated bond issues . .41 9.Bank of Finland’s spot transactions 26.Benchmark government bonds . .42 in the foreign exchange market . .113 27.Payment transactions 10.Bank of Finland’s forward transactions in the BoF-RTGS system . .47 in the foreign exchange market . .113 28.BoF-RTGS system,transactions by type . .48 11.Foreign exchange rates:annual middle spot rates . .114 29.Banks’minimum reserve deposits and 12.Foreign exchange rates: intraday credit limits . ..