samchain/econo-pairs-v1 huggingface dataset:
It fell sharply during the first half of this year (relative to income) and is likely to have fallen further since then (the dot at the end of Chart 9 is an estimate of the position at the end of Q3, based on recent moves in asset prices). All this suggests that, if household spending has been unusually independent of income since the pandemic, that is less likely to be the case from now on. The correlation with income is likely to be re-established. And it therefore mattered quite a lot, for the MPC’s projections in August, that households were set to experience further steep rises in their energy bills. Given the path of wholesale gas prices implied by financial markets at the time, OFGEM’s price cap was set to rise (in the central forecast) by over 3% of household income by next spring. Households’ real disposable income was projected to decline by 2½%, with consumer spending down by over 1%. This reduced inflationary pressure in the medium term, helping to pull inflation below target towards the end of the three-year  Bank of England  Page 17  forecast period. (I say “helping” because other things mattered too, not least the further rise in Bank Rate, to a peak of around 3%, then priced into financial markets.) It therefore mattered too that the new government then launched its Energy Price Guarantee, forestalling the rise in energy bills.

It’s understandable that employees and firms should want compensation for these losses, by raising wages and domestic prices. Unfortunately, and at least collectively, these efforts will not make us better off. The effect is to raise domestic inflation with no ultimate impact on average real incomes. The potential for these “second-round effects” was always uncertain. On the one hand, empirical estimates suggested that, since the 1970s and 80s, domestic inflation had become less susceptible to shifts in real income, perhaps because of improvements in labour-market flexibility. On the other hand, the economy hadn’t experienced a hit to real income on this scale. As it is, monetary policy has had to respond to the rise in domestic inflation as and when it’s become apparent in the data. The justification for tighter policy is clear. It remains the case that most of the overshoot in headline CPI inflation, relative to target, reflects the direct impact of higher import prices. It also remains likely that much of this is likely to fade as those prices stabilise. This appears already to be happening in areas most affected by the pandemic. The path of wholesale energy prices is highly uncertain but here too rates of inflation – annual rates have averaged over 300% in the past six months7 – are in time likely to fall significantly. Indeed financial markets suggest we’re more likely to see negative than positive inflation in wholesale gas prices a couple of years from now.
The main responsibility for counteracting financial imbalances cannot lie with monetary policy. If monetary policy seeks to pursue goals beyond its reach, the credibility of monetary policy will gradually weaken. Regulation and oversight of financial institutions must therefore continue to be the first line of defence against shocks to the financial system. The regulation of Norwegian banks largely follows EU rules, which in turn are governed by guidelines decided by the Basel Committee. Generally, we have been able to implement stricter regulation more rapidly than most other countries, partly because the economic downturn in Norway has been relatively mild. The Ministry of Finance has also introduced residential mortgage lending regulations to slow down the increase in house prices. Conclusion I believe both international and our own experiences with inflation targeting have been predominantly positive. While the exchange rate targeting regime that prevailed until the late 1990s tended to function procyclically, flexible inflation targeting has contributed to stabilising the economy when it has been exposed to shocks. In Norway, we can now look back on a quarter of a century of price stability. At the same time, employment has shown less variation since 2001 than in previous periods, in spite of the substantial disturbances that have hit the Norwegian economy. In the early years of inflation targeting, policymakers had high ambitions of fine-tuning inflation to meet the target and of achieving this goal within a clearly defined time horizon. But useful lessons have been learned.

Large exchange rate movements have at times been a source of instability. In Norway, the household, banking and corporate sectors as a whole take on currency risk to a limited extent. Furthermore, government finances are solid, and fiscal policy is not affected to any great extent by short-term exchange rate movements. This allows the exchange rate to play an important role in absorbing shocks to the economy. We have thus been able to reap the benefits of an efficient international capital market without having to deal with its challenges. 1/3  BIS central bankers' speeches  At the same time, in a world of high capital mobility and extensive trade, monetary policy’s room for manoeuvre is constrained by the exchange rate channel. In a small open economy with a floating exchange rate, the domestic interest rate can differ from interest rates abroad. However, an interest rate differential that becomes too wide can lead to considerable exchange rate volatility, which will in turn feed through to inflation, output and employment. Thus, the domestic interest rate cannot be set without regard to the level of external interest rates. The room for manoeuvre in monetary policy is further constrained in periods when external interest rates are close to or below zero. Although the financial crisis in 2008 had a marked impact on Norway, our economy was affected to a lesser extent than most other advanced economies. There are a number of reasons for this. The Norwegian economy was in an upturn when the crisis hit.
But there is no denying an adverse feedback loop between tightening credit conditions, the macro slowdown, and the perception that that will in time impair banks’ asset portfolios. So it seems timely to revisit some of the issues of “money and credit”. The Taylor-rule framework for thinking about policy It is well over a decade since John Taylor set out what has become part of the current orthodoxy of monetary economics. His rule looks something like this: *  *  *  i = Π +r + a(Π – Π ) +b(y -y ) t t t t t t t This is, at its roots, a Wicksellian view of the world. 4 By fixing the short-run nominal rate, the central bank can, given stickiness in prices over the short run, shift the short real interest rate – both in absolute terms and, more particularly, relative to the short-run real rate that would equilibriate demand and supply. 5 So that gap between the short real rate and its “equilibrium” can be thought of as representing the stance of monetary policy, which should be chosen by the central bank in the light of the extent to which inflation deviates from target, and to which aggregate demand deviates from the supply capacity of the economy. Implicit in this rule is  3  See Tucker, PMWT (2008) “ Money and credit: banking and the macroeconomy”, Bank of England Quarterly Bulletin, 2008 Q1 pp 96-106. 4  See Wicksell, K, 1898, “Interest rates and Prices”.

Early commentators on the developing international monetary system,  8  BIS Review 112/2008  combining a mixture of floating and fixed-rate exchange rates (so-called Bretton Woods II), 16 were inclined to the view that current account imbalances would prove sustainable – essentially because Asia would, they assumed, continue to finance the USA’s savings deficit. But, as has become apparent over time, that seemed to rely on the invisible hand smoothing over the counterpart imbalances within some net debtor economies, notably the USA; or, more crudely, of it making no difference that, in aggregate, American households had effectively given up saving. Given the now widely acknowledged ex ante imbalance a few years ago between global investment and Asian-fuelled global saving, this was associated with a compression of longterm risk-free rates and an associated rise in asset prices. And given frictions elsewhere in the system, including the US GSE’s guarantees reducing the headline returns on primemortgage securitisations, that contributed to compression in risk premia. And that, I fear, fuelled a “search for yield” in which investors, having enjoyed the extraordinary windfall gains that accompany rising asset prices, extrapolated forward their elevated ex post returns into ex ante requirements (Diagram A). 17 (Such extrapolation amounts to a bubble, but via the channel of a requirement or target rather than, directly, a simple expectation.) There’s only one way to deliver on such requirements in those conditions: take more risk and hope no one prices for it. Leverage and maturity transformation were the order of the day.
While there might have been an impact on specific service categories in January, overall there is no evidence that the euro cash changeover has had a significant upward effect on the average price level in the euro area or that the declining trend in annual inflation rates has been affected recently. BIS Review 15/2002  1  In the coming months, the effects of past increases in energy and food prices should gradually subside and annual inflation rates should fall to below 2%. The recent behaviour of producer prices also points in this direction. Beyond that horizon, we expect little upward pressure on prices from aggregate demand and, barring unforeseen developments, inflation rates to be in line with price stability. However, the current favourable outlook for inflation fundamentally rests on the assumption of a continuation of wage moderation. As I already noted last month, there is some cause for concern with regard to ongoing wage negotiations. A continuation of wage moderation in the euro area is crucial not only to foster employment growth but also to support monetary policy in its task to maintain price stability. With regard to fiscal policy in the euro area, the Governing Council welcomes the reaffirmed commitments of the governments of euro area countries with fiscal imbalances to adhere to the objective of achieving balanced budgets by 2003-2004. The confirmation of the political will to continue along the path of fiscal consolidation is most appropriate.

The Governing Council supports the actions taken by the European Commission in the context of the Stability and Growth Pact and the subsequent outcome of the ECOFIN Council meeting last month. It is now necessary to remain vigilant in order to ensure strict adherence to the medium-term plans and rigorous implementation of the procedures of the Stability and Growth Pact. In order to further improve the fundamentals of the euro area and to put the expected recovery on a broad and sustainable basis, euro area countries must strengthen their efforts to implement comprehensive structural reforms. Over the past few years progress has been made with regard to enhancing the flexibility of euro area product and capital markets. Euro area countries have also made some headway in terms of improving the way their labour markets operate. These reforms, together with moderate wage developments, have contributed to the strong employment growth and the considerable reduction in unemployment witnessed in many euro area countries in the last cyclical upswing. However, it is worth noting that despite the continued high unemployment in the euro area, firms continue to report difficulties in terms of recruiting suitably qualified workers. This suggests that further improvements in the functioning of euro area labour markets and their ability to match labour supply and demand are needed. Evidence gathered in a recent Eurosystem analysis, which will be published shortly, supports this view. In this context I would also like to stress that structural reforms in different markets should not be seen in isolation.
Hence, in 2008, while the total amount of foreign exchange purchased via buying auctions reached USD 7.584 million, USD 100 million was sold through two foreign exchange selling auctions. There has not been any direct intervention in the foreign exchange market. The total amounts of foreign exchange purchased and sold by the Central Bank from 2002 onwards are shown on a yearly basis in the table given below:  8  BIS Review 3/2009  Table 2: The Central Bank’s foreign exchange purchases and sales (2002-2008; USD million)  Year  FX Buying Auctions  FX Selling Auctions  FX Buying Interventions  FX Selling Interventions  Total Net FX Buying  2002  795  -  16  12  799  2003  5.652  -  4.229  -  9.881  2004  4.104  -  1.283  9  5.378  2005  7.442  -  14.565  -  22.007  2006  4.296  1.000  5.441  2.105  6.632  2007  9.906  -  -  -  9.906  2008*  7.584  100  -  -  7.484  Total  39.779  1.100  25.534  2.126  62.087  As of 15 December 2008  Problems in the international credit markets have heightened since the second half of September due to increased concerns over the credibility of the financial system, thus leading to liquidity problems in many countries.

In the event of excess liquidity, banks will be able to lend New Turkish Lira to the Central Bank at the Central Bank’s borrowing rate without any limit. (ii)  The current implementation of the Late Liquidity Window Facility will continue. Banks will borrow from the Central Bank against collateral, and lend to the Central Bank without any limit between 4:00 p.m. – 5:00 p.m. and on the last working day of the required reserve provision between 4:00 p.m. – 5:15 p.m.  (iii)  In case of a temporary or permanent liquidity shortage, the Central Bank will continue to execute its liquidity management mainly through one-week repo auctions. During the periods when the Central Bank does not apply a technical interest rate cut, the Central Bank will announce the amount of repo auction for the day of liquidity shortage on Reuters’ “CBTF” page at 10:00 a.m. As long as no extraordinary fluctuations are observed in the markets, the Central Bank, while determining the amount of the auctions, will endeavor to maintain the average auction interest rate as close as possible to the borrowing rate of the Central Bank announced for intraday transactions. (iv)  Weekly repo auctions will be held at 11:00 a.m. and the results will be announced on Reuters’ CBTG page no later than at 11:30 a.m. as much as possible. The traditional method will be used in auctions; in other words, successful bidders will be evaluated with their own interest rates.
Our lawyers perform pro-bono work for homeowners facing foreclosure and advise on legal reforms, while our researchers and market analysts have developed proposals to mitigate current problems and improve the future structure of housing finance. In my presentation today, I will explain why a more robust housing market matters for the wider economy. I will also highlight those factors specific to the housing market that create a risk that it will linger in an extremely weak state for longer than is necessary and remain vulnerable to further weakness. I will make the case for further housing-related policy interventions that would help stabilize home prices, improve the housing outlook and generate an earlier recovery in housing activity. I believe such actions would support growth and make monetary policy more effective in promoting the dual mandate given to the Federal Reserve by Congress – maximum sustainable employment in the context of price stability. The housing bust Given the excesses of the housing boom that took place in the early to middle part of the last decade, a substantial downward adjustment in housing was unavoidable. Since peaking in the second quarter of 2006, home prices have fallen by about 30 percent,2 returning to levels that last prevailed in mid-2003. In the states of Arizona, California, Florida and Nevada, where home prices rose much more than the national average, prices have declined by roughly 40 percent. Over the past year, house prices have declined by another 4 percent, though they remained roughly flat, when one excludes distress sales.

However, the TLTROs will not merely provide long-term funding. The TLTROs are targeted operations: the stronger the flows of new net lending to non-financial corporations and consumers (relative to a specified benchmark), the higher the amount that banks will be permitted to borrow from the Eurosystem at very attractive terms and conditions over a period of up to four years. Hence, we have built in strong incentives for banks to expand their lending beyond original plans – both banks with a recent record of positive lending and those that have been deleveraging. Overall, the measures adopted last month have already provided additional monetary policy accommodation. Even though substantial easing measures had already been priced in by markets before the Governing Council’s June meeting, money market rates and bond yields declined further after the announcement of our decisions. Expectations with respect to shortterm money market rates have come down some basis points from their already very low levels. Looking forward, we will maintain a high degree of monetary policy accommodation. In view of the outlook for inflation, we will keep the key ECB interest rates at current levels for an extended period of time. Moreover, the ECB continues to stand ready to take action, if necessary, to further address risks of too prolonged a period of low inflation. This could also include the use of other unconventional instruments in line with our price stability mandate. Challenges ahead Let me now turn to the challenges that the euro area will face in the years to come.
*  *  *  The resurrection of the financial system is well advanced, and the capital base and ownership structure of the new banks have been determined. The next step is to complete the financial restructuring of the savings bank system. The Minister of Economic Affairs has presented a bill of legislation on financial undertakings, which addresses a number of the shortcomings that emerged in their operations during the run-up to the crisis, including large exposures, related party lending, and owner eligibility. A number of projects must be tackled afterwards. The banking system is still too large for domestic needs. Our financial institutions are operating in the shelter of capital controls, and the future arrangements for their links to foreign financial markets are still undetermined. Furthermore, many domestic financial institutions have sizeable currency mismatches between their foreign assets and liabilities. This is risky and increases their need for capital. The financial institutions themselves will have to work diligently in order to reduce the imbalances in their currency composition, but because the hedge market is not functioning properly at present, it is possible that the Central Bank might assist them in repairing their foreign exchange balance through swaps with institutions that have an opposite mismatch. In addition, the Bank will soon review its precautionary rules on financial institutions’ liquidity and foreign exchange balance, in light of recent events. The Central Bank of Iceland has collaborated with savings banks and the Ministry of Finance on a solution to the recapitalisation of the savings banks.

The Central Bank interest rate that made the greatest impact on other rates was 17% a year ago, when the Bank held its 2009 Annual General Meeting. As of today, the corresponding interest rate – the average of current account rates and the highest CD rates – is just over 8%. But although interest rates have fallen significantly, it cannot be denied that they are still higher than desirable in view of the slack in the national economy, and they could be lower if the inflation outlook were the only criterion. This is the price we pay for the currency and banking crisis, the lack of credibility in foreign capital markets, and the limited access we have to those markets. Simply put, Icelandic interest rates include a large risk premium. If the capital controls are effective, as they appear to be at present, they obviously provide some scope to look beyond this risk premium. But the controls have not yet been tested by sharp and deep reductions in interest rates and a smaller interest rate differential with abroad than currently exists. Until now, there has been no occasion to take interest rate decisions based on the assumption that no steps will be taken to lift the capital controls in the near future. We hope no such circumstances develop. Strictly speaking, monetary policy in Iceland is not following the inflation target at present.
9  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  9  accounts (NS&I), and retail funds. Second, however, there are many affected areas of consumption for which there are no perfect (or even very good) substitutes. And as far as the dynamics are concerned, movements in infection rates have been extremely rapid – in Chart 5(b) we’re definitely in the red corner rather than the blue. This may have contributed to the drop in aggregate spending we saw in the second quarter of last year. If you anticipate that the worst will soon be over, and that the conditions for consumption will soon improve, you’re much more likely to delay some of it. Switching there may have been, but aggregate spending still declined and the saving rate still jumped (Chart 7). Third, and equally, the rapid dynamics are evident in both directions. Total consumption fell sharply in the spring, spending on risky activities even more so. But they both came back pretty smartly in the summer – much faster than in any normal cyclical upswing – as infection rates declined and lockdown was lifted. The jump in the saving rate in the second quarter was easily the largest rise on record in the (near) 60-year quarterly series. The drop in Q3 was also the largest fall on record. On average, in the UK data, the “halflife” of deviations in the saving rate – the time it takes to retrace half of any change – is over a year.

or above as soon as the deposit in the payer’s account allows this to be done. The system thereby transfers payment orders, which are above the minimum needed to qualify for the RTGS system, directly to or from participants’ current accounts with the Central Bank. The RTGS system has a triple function. Firstly, the Central Bank uses the system for the implementation of its monetary policy; secondly, it is used in transactions by credit institutions with the Central Bank; and thirdly, it is used for gross settlements between credit institutions. The security and functionality of this system are thereby preconditions for enabling the Central Bank to achieve its objectives for both price and financial stability. Consequently, operation of the RTGS system has been assigned to the Central Bank, a familiar arrangement from many other countries. The Bank’s duty is to strengthen the security, efficiency and independence of the system. At the end of 2002 agreements were made with all system participants specifying payment authorisations and collateral security for settlements. This represented a major step towards bringing arrangements for the credit institutions’ transactions with the Central Bank into harmony with best international practices. Automatic Central Bank guarantees for settlements in the RTGS system are thus a thing of the past. Work is still in progress on developing the system. This year it is expected that the rules governing it will be revised, its independence be enhanced, collateral security amounts for settlements be reviewed, handling times be shortened and settlement limits be lowered.