samchain/econo-pairs-v1 huggingface dataset:
Today I want to explain why, despite recent events, I believe that inflation targeting should remain a mainstay of macroeconomic policymaking in the UK. But we have to learn from the crisis, and I will discuss my views on the way in which the policy framework needs to be strengthened. I will conclude with a brief review of our asset purchase programme and, in particular, respond to some of the comments made about the programme. 1. Inflation targeting in action  Over the past year, the Monetary Policy Committee (MPC) has responded to the dramatic deterioration in the economic outlook with an equally dramatic easing in monetary policy. Bank Rate was cut by 4.5 percentage points in just six months and by 1.5 percentage points in November last year alone. That was the largest cut for 25 years and is twice the size of any reduction made by another G7 central bank in the past eighteen months. The MPC also voted to purchase £ of assets financed by the issuance of central bank money – equivalent to around 9% of annual UK GDP. The scale of the easing took many by surprise and some of the decisions may, at first blush, look rather courageous. Those of you who remember “Yes Minister” may recall that Jim Hacker, the hapless minister, became very nervous whenever Sir Humphrey suggested his decision was “courageous”. Central bankers can have similar instincts.

Although that decision will be highly uncertain and subject to intense scrutiny, the strategy guiding the decision – and the primacy of the inflation target within that strategy – should be clear. BIS Review 86/2009  5  4. Conclusion  The inflation target remains a vital pillar of the macroeconomic policy framework and should continue to provide the focus for monetary policy. But there are lessons that need to be learnt from this financial crisis. Good policy frameworks should provide policymakers with the right incentives to take difficult decisions and the right tools to implement those decisions. Inflation targeting goes a long way: the clarity of the objective and the transparency of the regime act as an important discipline on the MPC and short-term interest rates are, for the most part, effective in maintaining a broad balance between nominal demand and supply and so generating low and stable inflation. But they are not well suited to nipping incipient bubbles in the bud and restricting burgeoning imbalances. Policymakers need to make difficult judgements about asset prices and imbalances but they also need effective and efficient tools to enact those judgements. 6  BIS Review 86/2009
Above all, the monetary policy models used must better capture the roles in the economy of credit markets and asset prices, so that the consequences of financial imbalances can be analysed. Not only the price, but also the availability of credit has been discovered to be relevant. However, these assertions do not mean that the present models need to be scrapped. They serve us well in periods in which financial imbalances are not a major problem and intensive work is currently under way around the world to develop these models to better incorporate financial factors. Neither can it be required that the models capture serious financial crises. This would probably require the development of special analytical tools and models. The role of monetary policy must be developed and clarified. Even if improved supervision and regulation enable us to reduce the risk of serious financial imbalances accumulating, monetary policy will still face difficult dilemmas. The financial markets have a remarkable capacity to develop continually and to find ways past regulation. Consequently, we cannot rely on supervision and regulation always succeeding in preventing financial imbalances from arising. In the future, we will certainly continue to see various forms of bubbles, in which asset prices increase in a manner that is not sustainable over the long term, together with a rapid growth in credit. In such cases, the central banks must take a position regarding whether and to which extent monetary policy should consider this phenomenon.

The difficulties monetary policy is faced with when markets cease functioning normally has also been underestimated, despite previous experiences from, for instance, Japan. Monetary policy and financial stability overlap in several areas. Following the past year’s dramatic economic developments, it should be evident that insufficient financial stability leading to a major financial crisis seriously impairs the preconditions for monetary policy. Strategically important markets must be made to function in order to avoid a total collapse. Central banks have thus been compelled to undertake a series of unconventional measures, partly aimed at maintaining a functioning payments system and partly aimed at improving the functioning of the financial markets, thereby contributing towards the desired effect of the expansionary monetary policy. At the same time, there exists greater awareness of the fact that a monetary policy that does not adequately consider financial factors can lead to the accumulation of serious financial imbalances. Financial stability has been demonstrated to form an important restriction to the manner in which monetary policy can be applied in crisis situations. 3 Monetary policy models must become better at capturing the functioning of financial markets. In my opinion, the present monetary policy framework, in which monetary policy is aimed at stabilising both inflation and real development, still works well. However, monetary policy analysis needs to be developed, in certain respects, to enable us to make better forecasts within this framework.
When the interest rate falls, it is less profitable for households to save, and they will therefore increase their consumption now rather than wait until later. Borrowing also becomes less costly, with an associated rise in investment. Higher demand in turn leads to a higher rise in prices and wages. Lower interest rates make it less attractive to invest in NOK and less attractive for Norwegian enterprises and households to raise loans in other currencies. Lower interest rates will therefore normally result in reduced capital inflows and a weaker krone. This makes imported goods more expensive. In addition, a weaker krone increases activity, profitability and the capacity to pay in the internationally exposed sector. The equilibrium interest rate and the neutral interest rate are closely related concepts. The neutral interest rate is the rate that does not in itself result in an increase or a reduction in price and cost inflation in the economy in the course of a business cycle. An assessment of whether interest rate setting is expansionary or contractionary, involves comparing short-term market rates with the neutral rate. A real interest rate in the interval 3 – 4 per cent is often regarded as neutral in economies such as the Norwegian economy. I will revert to a quantification of this level later. In the longer term, the interest rate level influences capital accumulation in the economy and the potential for economic growth. The equilibrium interest rate is the rate that ensures that capital accumulation corresponds to saving in the economy.

When economic agents also understand Norges Bank’s response pattern in connection with events in the economy, market expectations concerning the interest rate will change as a result of economic news and to a lesser extent as a result of Norges Bank’s interest rate decisions in themselves. Norges Bank reduced the key rate at the monetary policy meeting on 17 September 2003. Short-term interest rates showed little change since the interest rate decision was expected by market participants. At the same time, the Bank changed its bias concerning future inflation. At the monetary policy meeting in August, the Bank stated that, with an interest rate of 3 per cent, the probability that inflation two years ahead would be lower than 2½ per cent was greater than the probability that it would be higher. Following the meeting on 17 September, the Bank stated that, with an interest rate of 2.50 per cent, the probability that inflation two years ahead would be higher than 2½ per cent was the same as the probability that it would be lower. Expectations concerning future short-term interest rates rose slightly, probably as a result of the change in Norges Bank’s bias concerning future inflation. This was perceived as new information by market participants. The yield curve was therefore a little steeper following the monetary policy meeting. 4  6  Svensson, L.E.O. (September 2002), "Monetary Policy and Real Stabilization". Princeton University  BIS Review 46/2003  The market’s expectations concerning future short-term rates can be reflected in forward rates.
This was around a tenth more than we estimated at the most recent monetary policy meeting. A large part of the decline is due to the fall in mortgage rates and energy prices. Underlying inflation measured as the CPIF, which excludes changes in mortgage rates, amounted to 2.1 per cent in January. This underlying inflation has also fallen in recent months, but not as much as CPI inflation. If one also excludes energy prices, underlying inflation amounted to 2.4 per cent in January. Food prices increased by around 5 per cent in January and are still holding up inflation. We see ahead of us that CPI inflation will continue to fall over the coming six months and that it will become negative for a large part of the year. But the heavy fall is mainly due to our cutting the repo rate, which means that mortgage rates fall. In addition, energy prices will be lower than one year ago, which will also push down inflation. At the beginning of 2010 the rate of increase of the CPI will quickly rise again and be over 3 per cent at the end of 2011. I shall return to this a little later. 6  BIS Review 25/2009  Underlying inflation measured as the CPIF excluding energy is calculated to be close to 2 per cent during the forecast period.

However, there may be reason to further develop the type of unconventional measures I talked about earlier and to do this at the rate motivated by the problems. Concluding remarks Let me now summarise my view of the current economic situation. The financial turmoil worsened in the autumn and has since then developed into a global financial crisis. As a result of the developments in the financial markets, international  BIS Review 25/2009  9  developments will be weak this year. There is also a considerable risk that economic activity will also remain weak next year. GDP growth in Sweden will be negative this year and inflation will fall. The Riksbank has therefore cut the repo rate to 1 per cent and may need to cut it further. At the Riksbank we have now begun work on producing new forecasts for the coming years. On 20 April, my colleagues and I will take a new monetary policy decision. We will then once more take a stance on economic developments and on how the interest rate should be set to attain our inflation rate of 2 per cent in the long term. Thank you! 10  BIS Review 25/2009
This doubling in China’s share in the world’s external trade will be complemented by an opening to the world of large sectors of the economy that have hitherto been closed to external investors: the telecommunications, financial services and distribution industries, for example, and a variety of technical and professional services. These are all areas with enormous potential in China. They have already, over the past decade, seen dramatic change and expansion through the - still raging revolution in information technology. WTO entry will give them a further boost by breaking down restrictive barriers and opening the channels for direct investment and technology transfer from outside. Increased foreign competition in these areas will force Chinese enterprises to speed up their reforms to meet the challenges. From a larger and longer perspective, further economic liberalisation and integration into the global economy will undoubtedly be a stimulus to regulatory, institutional and cultural change within China: I note that this is an important theme in today’s conference, although it seems to be a matter of some considerable debate what path, or paths, that change will follow. The general view, nevertheless, is that WTO entry will mean growth, integration and globalisation for the mainland’s economy. 1  BIS Review 68/2000  The implications for Hong Kong The view on the implications for Hong Kong are, on the other hand, somewhat divided.

At the extreme end of the spectrum there are those who believe that China’s WTO entry will be one more nail in the coffin, one more noose around the neck, for Hong Kong: that the diversion of business that will result from the now well-advanced infrastructural development in China’s coastal cities and the direct access provided through WTO membership heralds the demise of Hong Kong’s historical role as intermediary between China and the rest of the world. In support of this, the impressive physical developments in Shanghai, the readiness - and the skill - with which our colleagues on the mainland are embracing the English language and the internet, the important regulatory reforms are all cited as if it will only be a matter of a couple of years or so for all the business now going on in Hong Kong to be lifted up and poured into the millions of square feet of gleaming new office space now waiting in Pudong. The outlook is, I think, somewhat more complicated, and a great deal more positive, than this scenario suggests. And it is worth adding that we have seen so many nails hammered into Hong Kong’s coffin that the coffin is now more metal than wood.
For instance, in 2008, the SNB was involved in a coordinated reduction of interest rates, it concluded swap lines with the aim of alleviating tensions in money markets, and it remained in close consultation with other central banks. However, the principle that the SNB conducts an independent monetary policy for its own currency area remains completely unaffected by these activities. Cooperation and independence are not irreconcilable. On the contrary. Good cooperation promotes and reinforces the effectiveness of monetary policy decisions which have been taken independently. Perhaps this can be illustrated, once again, by using the example of the minimum exchange rate, which enjoys a high level of international acceptance – not least as a result of our excellent dialogue with other central banks. Neither are independence and the minimum exchange rate irreconcilable. The minimum exchange rate does not restrict our monetary policy independence, as some observers wrongly claim. Rather, it is a genuine expression of our monetary policy independence. The minimum exchange rate is not a move towards the euro and most certainly not any tie to the European currency. What it in fact does is to ensure appropriate monetary conditions for our country in an economic environment which remains extremely difficult. Meanwhile, the value of the Swiss franc is still high. In the long run, a central bank can only pursue an autonomous monetary policy in line with the needs of its country if it is independent.

In addition, we are currently emphasising the fact that, as a result of the low rate of inflation and the risk of appreciation, the minimum exchange rate will be the focus of monetary policy implementation for the foreseeable future. So you see, the SNB is carefully monitoring international debates about the right objective and the best way of communicating monetary policy. Nevertheless, no central bank should simply jump on the latest monetary policy bandwagon without careful consideration. On the contrary. Changes must be undertaken with great caution and care. Our monetary policy strategy worked well during the crisis, so there is no reason for us to abandon it. This also applies to the way we communicate, where – obviously – the demands are particularly great in times of crisis, and it is necessary to focus more than ever on the key messages. To avoid any misunderstanding, these messages must be simple and absolutely clear. Nevertheless, words alone are not always sufficient. A central bank must be prepared to back up its words by deeds. A good example of this was the situation in early summer 2012. With the European debt crisis escalating and, as a result, extreme upward pressure on the Swiss franc in the currency market, we rigorously enforced the minimum exchange rate through extensive foreign currency purchases. I would like to make a final point on monetary policy. During the crisis, central banks worked particularly closely together at the international level.
26 At a minimum, when taken together with survey indicators that continue to point to solid pay growth for new recruits, recent data give welcome reassurance that the risks associated with a deflationary mindset in the labour market have likely fallen significantly. Further positive wage developments should be supported by a continued tightening in the labour market. Job-to-job flows remain around post-crisis highs and the ratio of vacancies to unemployment is now back to its pre-crisis average. However, what matters for inflation is not wage growth in isolation but wage growth relative to productivity. Put simply, firms are less likely to raise their prices if higher wages reflect more output per hour worked. Along with faster wage growth, there have been signs of faster productivity growth since the turn of the year. This may well mean firms’ unit labour costs have not picked up quite to the degree we had expected in our May Inflation Report. It’s too early to be definitive. Weighing past disappointments and recent indications of a pick-up, it is prudent to recognise that two-sided risks to productivity growth remain. What is clear is that to return inflation to target, growth in labour costs must pick up further from their current rate of less than one per cent. The extent needed depends on what is happening to other costs.

While there is arguably some logic to this argument, investors clearly have other alternatives if they seek exposure to the price of gold. There is no doubt that no hedging at all would have been better from a shareholder’s perspective than the kind of pro-cyclical policy that was followed in the past. Nonetheless, it seems to me, we cannot rule out that the gold mining industry will start increasing its hedging activities again at some point in the future. Fifth argument: central banks will adopt a homogenous attitude towards gold. At the end of 2005, central banks had officially declared reserves of around USD 3,500bn. Of this amount, around 15% was invested in gold (Graph 3). The proportion of gold varies considerably from one country to another. For instance, it amounted to more than 70% for the United States, 50% for the Eurozone, 40% for Switzerland, 4% for India, 2% for Japan but less than one percent for Brazil, China, Hong Kong, Korea or Malaysia. These variations have always been a source of market rumours. At the end of the nineties, the prevailing question was: what if European central banks would reduce their gold holdings to 10% of their reserves? Now, the question is: what if Asian central banks would increase their holdings to 10% of their reserves? I doubt that in the foreseeable future, these national discrepancies related to gold reserves will diminish significantly, let alone disappear.
In contrast to the nominal exchange rate, which is the relative price of different currencies, the real exchange rate is the relative price of groups of goods. More specifically, the real exchange rate is defined as the amount of domestic goods that has to be provided in exchange for a given amount of goods from abroad. The value of the real exchange rate is calculated in practice as a quotient, the denominator being the product of the nominal exchange rate and an appropriate price index for foreign goods and the numerator the corresponding domestic price index. The real exchange rate is commonly regarded as a measure of a country's international competitiveness. The weaker the real exchange rate - the more domestic goods that are needed to balance a given amount of foreign goods - the cheaper it is for firms and consumers abroad to buy Swedish products: our competitiveness is stronger. It follows that the real exchange rate is a measure of purchasing power; the weaker the real exchange rate, the smaller the amount of foreign goods that can be bought for a given amount of domestic goods. This needs to be kept in mind when discussing what are appropriate central and conversion rates. A weak rate can admittedly confer competitive advantages but it also means that people in Sweden are poorer. Sweden's full participation in the monetary union locks only one of the components of the real exchange rate - the nominal exchange rate.

This is the first time we intervened in the foreign exchange market since 1999. Relatively quickly after the interventions, the market began to function more normally. 1/4  BIS central bankers' speeches  Later in spring, the krone appreciated on the back of a rise in oil prices and reduced uncertainty in global financial markets. Recently, oil prices have been broadly at the same level as at the beginning of 2020, and the krone is somewhat stronger than prior to the Covid-19 outbreak. In spring 2020, risk premiums in the Norwegian money market rose considerably. Norges Bank took a range of measures to improve market liquidity and ensure pass-through of a lower policy rate to money market rates and bank lending rates. Among other things, Norges Bank offered banks extraordinary liquidity in both NOK and USD. In advance of the monetary policy meeting in May, financial market stress subsided and premiums in both the money and bond markets fell. The normalisation of liquidity policy is well underway. By the end of August 2021, all extraordinary loans from Norges Bank to banks will have been repaid, and the relaxation of collateral requirements for loans from Norges Bank will be reversed. Downturn in the Norwegian economy Activity in the Norwegian economy fell abruptly in 2020 Q2. The Covid-19 outbreak and extensive containment measures led to production halts and lower activity across a range of businesses. Mainland GDP was around 11 percent lower in April 2020 than in February the same year. Many employees were furloughed or made redundant.