samchain/econo-pairs-v1 huggingface dataset:
In autumn 2012 we expect an interest rate of close to 3½ per cent, while market participants expect an interest rate of around 2¾ per cent 3. The deviation is considerable, but not exceptionally large. Our interest rate forecast seems to have the greatest effect on market interest rates in the year ahead. The difference is greater slightly further out. Differences may indicate that the central bank and market participants at times have divergent views regarding developments in the Norwegian economy. How does the market react to the publication of the interest rate forecast? For example, market participants may believe that a higher interest rate level in Norway than in other countries will result in a stronger krone exchange rate because it may be profitable to invest in Norwegian kroner and borrow in other currencies. Our projections are based on the assumption that the exchange rate will over time adjust so that the return on investments in Norwegian kroner will be the same as the return on investments in foreign currency – the so-called uncovered interest rate parity assumption. A positive interest rate differential will then reflect that the krone is expected to depreciate over time. At the same time, we seek to take account of the fact that risk premiums on investments in Norwegian kroner may vary over time. The interest rate forecasts have been useful – and it is an advantage, not a weakness, that the uncertainty surrounding the forecasts is well known.

Private sector credit growth has averaged less than 3% in the UK, US and the euro area over the past decade, generally less than nominal GDP growth. Aggregate debt servicing ratios are below historic averages, in part due to low equilibrium interest rates. Although there are pockets of risk, heat maps that mechanically bring together several credit measures remain relatively cool overall (Chart 7) – though aggregates can hide important pockets of risk that can amplify negative shocks, and, as I’ll discuss, it is a different picture for China. See Reinhart, C, Rogoff, K, (2010), Growth in a Time of Debt, American Economic Review. For example, see Bridges, J, Jackson, C, McGregor, D (2017) Down in the slumps: the role of credit in five decades of recessions, Bank of England Staff Working Paper N. 659; Borio, C, Drehmann, M, Xia, D (2018) The financial cycle and recession risk, BIS quarterly review; Taylor, A, Schularick, M (2012) Credit Booms Gone Bust: Monetary Policy, Leverage Cycles, and Financial Crises, 1870-2008, American Economic Review; Aikman, D, Bridges, J, Kashyap, A, Siegart, C (2018) Would macroprudential regulation have prevented the last crisis?, Bank of England Staff Working Paper N. 747. 15 There are various definitions of a credit boom in the empirical literature – for a brief summary see Gorton, G, Ordoñez, G (2019), Good Booms, Bad Booms, forthcoming in the Journal of the European Economic Association.
We make it clear in the Inflation Report that we consider the risks of a poorer development in Swedish and international economic activity to have declined as the recovery has progressed. Experience also shows that it is easy to underestimate the force of an upturn once it has found a foothold. Developments in the labour market in both Sweden and the United States are one factor pointing in the other direction. In addition, developments in the euro area remain sluggish and in the United States there are problems with imbalances in foreign trade in particular. Our opinion is nevertheless that, compared with the picture we present in the main scenario, there is an upside risk for inflation from economic activity in Sweden and abroad, with links to price trends. There are arguments that we could have either overestimated or underestimated cost pressure. Compared with the December assessment, we have revised up our basic view of productivity, although there is considerable uncertainty in this area, given the surprising developments over the past six months. On the other hand, the uncertainty regarding wages has diminished somewhat, as central wage agreements have now been concluded for a large part of the labour market. All in all, our assessment is that the risks in this field are balanced.

In a comparison with a number of other inflation-targeting countries, it is evident that Swedish inflation was closest to the target level last year, measured as an annual average, and that it was fairly average with regard to deviations from the target level. As monetary policy’s effect on inflation has a time lag, the outcome of inflation in 2003 is largely a result of the monetary policy conducted in 2001 and 2002. Let me therefore report some of our considerations in the light of the developments and forecasts made then. At the beginning of 2001 the repo rate was 4 per cent. During the spring there was a severe depreciation of the krona. Despite the fact that economic activity in Sweden and abroad was in a weakening phase, domestic resource utilisation was at a high level, while inflation had increased significantly during the spring and exceeded the upper tolerance limit. Inflation expectations had also begun to rise. Given this, we raised the repo rate in summer 2001. Economic developments and monetary policy considerations in Sweden differed from those in many other countries, where monetary policy in many cases had begun to be more expansionary. The decision to raise the interest rate in July 2001 was not self-evident. Three Executive Board members entered reservations against the decision, with reference to the weakening economic activity. The terrorist actions in September 2001 caused us to cut the rate by half a percentage point. Our assessment was that confidence among both households and firms would deteriorate.
As in the case of foreign currency mortgage loans — and you remember how we had to deal with the crisis related to foreign currency mortgage lending — when people choose a product with a floating interest rate, especially where the initial interest rate is lower, they may be unable to comprehend that they are accepting serious interest rate risks associated with changes in market conditions and rate increases. In this regard, it would be better to prevent a situation we had to address in foreign currency mortgage lending. This also requires regulation, in our opinion. Currently, we are closely studying the international experience in floating interest rates regulation. These practices are quite diverse and comprise both prohibitions and certain limits on a floating range. We also need to introduce such regulation into our laws. Summing up this part of my statement, I would like to stress that we can certainly see no good in establishing new restrictions again and again. Actually, this is not our policy to continuously introduce new restrictions. However, we may not follow Wild West rules, given the maturity level of our financial market. We will need such direct restrictions on an ongoing basis until the banking sector implements efficient self-regulation. The worst thing is that we have to constantly play cat and mouse with you. Banks are inventing a new ‘relatively legal’ scheme — we are liquidating it. This is inevitably increasing the number of disappointed clients.

Today, there are a few areas I would like to focus on: First, I will very briefly recap our Op Res policy, including our expectations of firms and the links to other key policy areas such as outsourcing and Critical Third Parties (CTPs); Second, I will share with you some initial assessments of firms’ progress based on our supervisory work on UK banks and building societies so far; and Finally, I will cover what is coming up next in our Op Res roadmap; this includes our expectations around what firms should be doing, and the supervisory steps the PRA will be taking. 1. The PRA’s operational resilience policy 1/6  BIS central bankers' speeches  Starting with the first of those points, I will provide a short recap of our expectations of firms in the Op Res policy. I will keep this brief as I am aware that many of you will already be very familiar with our expectations. In particular, there are three particular policy expectations that I will draw out. i) Important Business Services The first is the requirement for firms to identify their IBS. Here we expect firms to take a holistic approach and consider all parts of their business in order to identify the full suite of services they offer, and then which of those should be deemed “important”. The definition of “importance” should be based on a service being provided to an external end user and having the potential to threaten regulatory objectives in the event of a disruption.
Another important factor is that productivity growth in the US is expected to secure sound profit trends over the longer term, with the decline in corporate investment turning up slightly next year. Although business and industry have been sheltered so far from the slowdown in the world economy, the Norwegian economy may gradually be more strongly affected. Slow growth in the world economy may lead to lower demand for Norwegian produced goods and curb the pressures in the Norwegian economy. In addition, slower growth in the world economy may push down imported price inflation, which may imply that price inflation will be lower than we have projected. Our forecasts provide an indication of the scenario we consider to be the most likely, given that key variables such as interest rates, the exchange rate, public demand, wage formation and oil prices are in line with our assumptions. If these variables deviate from our assumptions, the real economy and nominal developments may also show a different path. BIS Review 74/2001  13  The Norwegian economy is balancing on a tightrope. It will not take much to throw the economy off balance. While the overall global situation suggests that consumer price inflation may be somewhat lower than anticipated in the period ahead, the domestic economic situation points in the opposite direction. Growth in domestic labour costs may turn out to be higher than estimated.

In the US, the slowdown in growth has been more pronounced than expected by most observers when the first signs of a turnaround emerged last autumn. Industrial output has declined over the last 10 months and business investment has shrunk by almost 14 per cent, annualised, in the second quarter. Moreover, the impact on Europe and the emerging economies in Asia has been substantially greater than expected. The shift in perceptions of the outlook is reflected in the estimates from Consensus Forecasts. Since the beginning of the year, growth forecasts have been revised downwards by 2 percentage points in Japan, 1½ percentage points in Germany and 1 percentage point in the US. Not since 1974 has GDP growth been below 2½ per cent in all three countries. Growth among our trading partners has been revised downwards by 1 percentage point to a little less than 2 per cent, which is the lowest rate recorded since 1993. Growth forecasts for 2002 have also been adjusted downwards somewhat, but growth is still expected to pick up next year. However, there is substantial uncertainty associated with these forecasts. 12  BIS Review 74/2001  The forecasts are to a large extent based on the assumption that household consumption will continue to fuel growth in domestic demand, as has been the case in the US and Europe so far this year. This is expected because of the solid financial situation of the household sector in most industrial countries after many years of rising employment and real wage growth.
Without them, it would have been impossible to make sense of the chaotic dynamics of global economies and financial systems at the time. In other words, nothing could have provided a better case study of the importance of Max’s work than the crisis. And it is lessons from the global financial crisis with which I want to begin. These are of course many and varied. But among the most important is also perhaps the simplest: to safeguard against systemic risk, the financial system needs to be managed as a system (Haldane (2009)). As put, this statement seems rather obvious, perhaps even tautological. Yet, pre-crisis, it was far from obvious. The orthodoxy then was that safeguarding individual financial firms was a necessary and sufficient condition for system-wide stability. This was the financial stability equivalent of the English aphorism: “look after the pennies and the pounds will look after themselves”. And so it appeared during the long pre-crisis period of stable growth and stable banks – the “Great Moderation” (Bernanke (2004)). The crisis has rewritten that orthodoxy. It revealed that the safety of individual banks was neither a necessary nor sufficient condition for systemic stability. Not necessary because, in any well-functioning system, individual banks can and should fail. Not sufficient because, in an integrated web, the chain is only as strong as its weakest link. In focussing on individual banks, policymakers had been, to coin another English aphorism, “penny-wise but pound-foolish”. That is why Great Moderation gave way to Great Recession (Gai and Kapadia (2010)).

The importance of fisheries as a generator of foreign exchange revenue has diminished in relative terms - to less than a half of the total - while the importance of other sectors has risen, such as manufacturing industry, information technology and tourism. In these developments, Iceland is among other things drawing benefits from globalisation to strengthen the foundations of the economy. Foreign direct investment regulations are liberal with the exception that such investment is not permitted in the fishing sector. Foreign direct investment is most noticeable in power intensive industry, such as the production of aluminium, which is based on Iceland’s abundance of untapped renewable energy resources. Recent changes in corporate taxation in Iceland, lowering corporate taxes to among the lowest to be found, serve to attract foreign business to Iceland and encourage Icelandic companies with international operations to favour Iceland as the base of their operations. 2  BIS Review 51/2002  Direct investment by Icelandic companies abroad has risen rapidly in recent years and in a variety of areas, such as fisheries and fish processing, pharmaceuticals, retail commerce and financial services. These developments also benefit the Icelandic economy in the long run as they integrate Iceland further into the global economy, allow Iceland to draw more easily on the experience of others and bring in dividends.
Asset prices are, however, taken into account in a regime that explicitly targets inflation in terms of the consumer price index or a variant of this. This occurs via household wealth effects and corporate capital costs, which influence total demand, alter the output gap and thereby modify inflation prospects. If asset prices rise so strongly that, via increased demand, inflation tends to rise above the targeted rate, the central bank will normally respond by tightening the monetary stance. Conversely, the monetary stance will be eased if asset prices fall so much that inflation is liable to be below the target. Thus far the analysis is fairly straightforward. Even if asset prices do not feature explicitly in the target variable, they will be taken into account in a monetary policy model that targets the consumer price index. Sweden had a combination of high inflation and rising asset prices in the 1980s. It might then be argued that policy failed to concentrate on price stability in terms of the consumer BIS Review 58/1998  -5-  price index. It should be noted that with the fixed exchange rate regime at that time, the overheating in the economy was primarily a matter for fiscal policy. Price bubbles developed in asset markets, followed later by price falls for shares and real estate, for example. This in turn led to the severe bank crisis. But can the Swedish bank crisis be explained simply in terms of an insufficient focus on price stability?

But it would be disappointing if that debate degenerates into recrimination and antagonism. That would be to obscure the remarkable consensus that now exists - throughout the European Union and indeed more widely, and across a broad spectrum of political opinion within the countries of Europe, including this country, on the broad approach to macro-economic management. This unforced consensus extends to monetary policy directed to price stability, and it extends to budgetary policy directed to medium and longer-term fiscal sustainability. There is growing recognition, too, across the continent, of the importance of structural policy directed to supply-side flexibility. This strengthening consensus is fundamentally important - more fundamentally important, in terms of the economics of it at least, than whether these common objectives are pursued inside or outside the framework of monetary union. Pulling these thoughts together, it would be a mistake in my view for monetary union to go ahead without reasonable confidence of genuine, sustainable, convergence between its members; and it would be a mistake for any individual country to seek to join, or to be permitted to join, unless it had achieved genuine, sustainable, convergence. If there are serious doubts - generally or in any particular case - it would be in no-one’s interest to proceed. But it would be just as big a mistake, if monetary union does not go ahead, or for countries on the outside, if individual governments saw that as an opportunity to seek to take short-term advantage of the apparent macro-economic freedom that that gave.
What was interpreted as a cyclical problem was fundamentally a structural problem. There was a pressing need for restructuring. Norwegian industries – shipping and wood processing, shipyards and steel works – had allowed themselves to become dependent on high growth and cheap energy. High wage increases pushed up cost levels in manufacturing, and inflation accelerated, amplifying imbalances instead of solving problems and weakening international competitiveness even further. The current account deficit was record-high. A countercyclical policy that resulted in labour market pressures and that kept firms alive artificially provided little help. It delayed restructuring, while inflation and fiscal deficits made restructuring even more urgent. Economic structures were protected rather than being reformed. Countercyclical policy became counterstructural policy. 2 When economic policy changed course around 1980, the Norwegian economy started to get back on its feet again, but Norway’s growth potential was low and new imbalances were building up. The fall in oil prices in 1986 sparked a new, and even deeper, crisis in the Norwegian economy. The economic policy conducted in the 1970s was intended to follow Keynes’ advice. Subsequent developments proved Hayek’s point. To curb a crisis on a lasting basis, the measures implemented must also address the deeper causes of the crisis. The global financial crisis was triggered by the Lehman Brothers bankruptcy on 15 September 2008. The crisis has been attributed to a number of factors. One important event was China’s accession to the World Trade Organization (WTO) on 11 December 2001, almost seven years earlier.

Such reforms will take time. Immune system The situation in Europe illustrates how difficult it can be to curb a crisis once it has arisen. It might therefore be wise to give priority to crisis prevention. A healthy economic system is less vulnerable. Crises can be curbed – or even avoided – by boosting the resilience of the economy. Rather than treating the disease after it has taken hold, much can be accomplished by strengthening the economy’s immune system. The financial crisis revealed deficiencies and system failures worldwide. Many governments and households had taken on too much debt. US investment banks such as Lehman Brothers operated a high-risk business model with low levels of equity. European banks were too dependent on short-term funding in international markets. In a period of growth, it is easy for banks to obtain funding. But the system is fundamentally unstable. Without adequate capital requirements in the banking system, credit growth can spiral out of control. Hayek gave lectures on this topic at the London School of Economics in the early 1930s. 4 The LSE is still home to many economists who argue against the risks of debt-financed growth. 5 Solid banks are built in good times. Solid banks bolster the resilience of the economy and make crises easier to manage. Since the financial crisis, the G20 countries have implemented substantial changes in the global regulatory framework for banks.
The monetary policy response to an exchange rate shift also depends on the underlying cause, the perceived duration of the shift and the economic situation in other respects. • •  If the krona weakens on account of portfolio shifts that stem in turn from fears of rising inflation, for example, it is natural for this to elicit a tighter monetary stance. That was in fact a major argument for the Riksbank’s policy from 1993 to 1995. If, on the other hand, the exchange rate weakens at a time when overall inflationary pressure is low, for example in connection with declining international demand, this does not necessarily imply a threat from inflation. The weaker exchange rate is then rather a part of a real economic adjustment. Such mechanisms were presumably involved last autumn. Monetary policy therefore has to be based on an assessment of inflation prospects that is as comprehensive as circumstances permit. The exchange rate is one important factor in this assessment but normally it should not play an isolated role. That is why the Riksbank has chosen not to use a monetary index—a weighted combination of interest rates and the exchange rate—as an intermediate target. The Riksbank’s view of the exchange rate has altered a good deal since 1992. We have gradually placed more emphasis on the krona’s forecast path and been less concerned about its occasional fluctuations. As I see it, a number of things have contributed to this.

And many market participants were also expecting a correction at some point; but they generally felt they were well placed to handle it. In fact the severity and breadth of the downswing has surprised markets, commentators, and policymakers alike. In the light of subsequent developments, a number of commentators have concluded that the problem was simply a lack of attention and short memories. I don’t think it was quite as simple as that. I am with Mark Twain who said "History doesn't repeat itself, but it does rhyme." While the current crisis has some similarities to previous downswings – in the early 90s or of the 70s for example – there are some significant differences too. For example the last three recessions in the UK (in the 70s, 80s and early 90s) were preceded by sharp rises in consumption and activity and earnings to well above sustainable rates. As Chart 2 shows that was not true of the last few years when consumption, output and earnings all seemed unusually stable. Again in previous recessions, stress in the banking sector has tended to follow on from defaults and losses on domestic loans as interest rates rise and the economy slows down. But this time the downturn started in the banking sector – last summer when losses in the US property market not only led to losses in UK banks trading and treasury books but closed important sources of finance to them. The downturn in the housing market and then the wider economy followed.