samchain/econo-pairs-v1 huggingface dataset:
It is now well accepted that there are deep and fundamental causes for that prolonged coincidence of low interest rates and low inflation. In advanced economies, and possibly worldwide, equilibrium real interest rates have dropped to very low levels. Falling equilibrium rates may require zero or negative policy rates and, more broadly, very accommodating monetary conditions that conventional instruments cannot deliver. Hence the development of non-conventional monetary policies in all our economies. Part of the fall in equilibrium rates is a consequence of the crisis and the subsequent deleveraging and balance sheet repair that is taking place in many sectors of the economy. Part may predate the crisis itself and result from shifts in global desired saving and investment. Whatever the causes, low equilibrium rates complicate the task of monetary policy. Because of the zero lower bound on nominal rates, they constrain the ability of central banks to react to negative cyclical shocks. They may lead to cumulative downward spirals if low inflation keeps real policy rates above the equilibrium level. In addition, the perceived inability of monetary policy to keep inflation close to the objective may fuel pessimistic expectations, a point to which I shall return. Over the last two years it has become increasingly apparent that all those risks are materialising in the euro area. Finally, low equilibrium rates worsen the trade-off between price and financial stability. Policy rates must be brought down for price stability to be preserved.

Even if residents choose to move into foreign assets, the liquidity in the domestic currency will not disappear and will ultimately be deposited with the domestic banking system. In the end, and as a whole, the banking system is trapped. The question then is how banks will react and with what consequences for the economy. They could impose negative rates on depositors, but that is not always easy, and in the case of households, it could have a negative impact on the wealth sentiment. They could increase their credit margins, with the effect of tightening credit conditions, although that may also be difficult if the demand for credit is weak. Or the banking system could simply become weaker, with the paradox that the more a bank is conservative and well-managed, extending high-quality loans and covering them by deposits with no short-term market funding, the more it will be penalized! A second, different challenge, relates to the rigidities in the economy. Price rigidity is higher in Europe than in the United States as the goods and labour markets are less “contestable” and outsiders find it harder to compete. And in the labour market, there is a strong downward rigidity on wages. Structural rigidities have complex effects on inflation and monetary dynamics. In the very short run, price rigidity may somehow protect the economy against deflationary shocks and, more generally, increase the output response to a monetary stimulus.
[5] That is why the PRA sets out clear expectations for firms wanting to branch into the UK. [6] It is why we build trusted relationships with supervisors in other jurisdictions, supported by a growing number of Memorandums of Understanding. [7] It is why the Bank provides support for the Government’s work pursuing free trade agreements with financial services chapters, and bespoke mutual recognition agreements, that facilitate safe access to overseas markets for UK firms. [8] And it is why we recognise that prudential regulation mustn’t create barriers that stop global talent working in UK firms whilst at the same time failing to advance our primary objective. For that reason we are reforming remuneration rules, starting with a consultation on removing the bonus cap. [9] As well as openness, we are acting to strengthen the UK as a global financial centre by providing a predictable and stable regulatory environment. This makes it easier for all firms – domestic and international – to do business here. We’ve improved the way we communicate. The Bank and PRA now work with six other regulators to produce a regulatory grid setting out our plans in one place. [10] And we are developing a new UK rulebook that will be easier to navigate than the labyrinth of regulations – many of them EU rules – we are replacing. [11] I should reassure you that stable and predictable regulation doesn’t mean static regulation. Innovation is one of the UK’s strengths.

Fourth, we have thoroughly analysed the issue of nonperforming loans (NPL), both at banking system level and at an individual bank level, and we are developing comprehensive measures which would create conditions for reduction of these loans, including strengthened loan-loss provisions, higher NPL write-offs, improved collateral valuations, enhanced disclosure practices, and strengthened data collection. Fifth, we are continuing the efforts to bring the regulatory framework fully in line with the EU law. For example, we are drawing up a completely new law on payment services and payment systems which, inter alia, would strengthen the requirements for security of payments made electronically and via Internet. I mention all these priority tasks of the BNB because for their performance we would largely rely on our constructive partnership with you, as we have done so far. Of course, we are well aware of the specific challenges that you too are facing. The strong pressure on profitability with a still weak, though increasing, and demand for loans requires that you keep seeking solutions for greater efficiency. The topics of credit risk management and costs policies would more and more be high on the agenda also because it is likely that we would witness another cycle of rising interest rates, given the worldwide trends and the expectations of such a development in the euro area sooner or later. These are topics that we will continue to discuss. Thank you for the good cooperation, and congratulations on the 25th anniversary! 2/2  BIS central bankers' speeches
Household saving is negative and over time households must be expected to seek to redress their financial imbalances. Interest rate developments and a weaker housing market will probably have a dampening impact on demand for goods and services and push up saving. On the upside, we expect sharp growth in government spending, with a marked increase in government purchases of goods and services. Petroleum investment is projected to remain high. Current information nonetheless points towards somewhat slower growth further into 2008. In the monetary policy reports, the results of this assessment are presented in the form of this chart, which shows the baseline scenarios for the interest rate, inflation and capacity utilisation in the economy. Monetary Policy Report 1/08 noted that the outlook and the balance of risks suggest that in the near term the interest rate should be set somewhat higher than projected in Monetary Policy Report 3/07. The prospect of higher price and cost inflation will in the short term more than outweigh the effects of weaker growth in the world economy. There is considerable uncertainty surrounding the projections. The projections for inflation, output, the interest rate and other variables are based on our assessment of the current economic situation and our perception of the functioning of the economy. The uncertainty surrounding the projections for the interest rate, inflation and capacity utilisation is illustrated by fan charts. The wider the fan charts are, the more uncertain the projections are.

There could be sound reasons for this, although opinion is divided on the matter. Let us examine Iceland’s current interest rates more closely, ignoring for the moment the problems associated with pursuing independent monetary policy in small, open economies with unrestricted capital flows, which I will mention later. Let us also assume that inflation expectations remain at target, as they are at present. The question of whether or not a nominal policy rate of 5.25% is appropriate then centres on what is considered to be the equilibrium real policy rate; i.e., the interest rate that would keep inflation at target when the economy is in balance. With inflation expectations at 2½%, the real policy rate is currently just over 2½%. Before the financial crisis, the equilibrium policy rate was estimated to be quite a bit higher. As is the case elsewhere, it has probably fallen in the wake of the crisis. Furthermore, recent success in monetary policy may mean that we do not need as high an interest rate as before to keep inflation at target. We do not know how much the equilibrium rate has fallen, although the subject has been under close scrutiny within the Bank and has been discussed repeatedly at Monetary Policy Committee meetings. The newest research on the assessment of the equilibrium real rate will be presented at a seminar held at the Central Bank on 29 November. Perhaps there will be scope in the future to lower the short-term real rate as measured by inflation expectations somewhat further.
Of course, this does not prevent differing opinions being held, both within the Riksbank and by external analysts, as to how the repo rate should be managed in order to maintain price stability. Monetary policy is based on how the inflation rate is expected to develop in the near future, primarily 1-2 years ahead. There are two reasons for this. The first is that monetary policy measures make their full impact on inflation during this time horizon. Thus, the Riksbank has little possibility to counteract shocks that affect inflation in the short term, but it can conduct a well-balanced monetary policy to ensure that inflation is maintained around an average rate of 2 per cent a couple of years ahead. The second argument in favour of forward-looking monetary policy is that this provides scope for taking into account developments in the real economy. If the repo rate were to be changed continually to try to bring inflation back to the target level as quickly as possible every time a shock occurred, it could lead to considerable, and undesirable, fluctuations in interest rates, production and employment. During the years that monetary policy has employed an inflation targeting strategy, we have developed a clear analytical framework for our work. The Riksbank has developed a simple rule to make monetary policy more easily comprehensible and to create stability when making monetary policy decisions.

Developments in the public sector were unexpectedly strong at the beginning of the year, which counteracted the fact that developments in the private sector were weaker than we had expected. The strained economic situation in the public sector indicates that employment there will develop weakly during 2004, while the economic upturn is still not expected to be reflected in any increase in the number of employees in the private sector. The fact that the labour market to some extent lags behind production development in the business sector is a normal part of the economic cycle, but developments in employment in the private sector have so far been slightly weaker than we had expected. Monetary policy can only marginally influence the weak labour market situation in the coming months. However, the situation in the labour market is a central factor in the assessment of demand and thus  2  BIS Review 7/2004  for long-term assessments of inflation. Labour market developments can influence future inflation in several different ways. If the demand for labour remains weak during a longer period and unemployment soars, there is a risk that this will have negative repercussions on household consumption and thus on demand. Households have become more pessimistic during the autumn, both with regard to unemployment and with regard to their private finances. So far we have seen no signs that household demand is about to slacken, but this was a factor we included in the risk assessment in the December Inflation Report.
We appreciate that firms are at different stages on the development of the diversity and inclusion data strategy and the purpose of this survey is to understand better what data firms currently collect about their workforces. We are especially keen to receive feedback on the challenges of collecting diversity and inclusion data. I would like to take this opportunity to encourage you to participate in the survey as it may help to shape potential future regulatory returns, so the more information we can learn from firms, the better. It is particularly valuable to hear from small firms to ensure that we receive a representative sectoral response and it is important that the voice of the mutuals sector be heard in this discussion. Climate change Since our former Governor, Mark Carney’s speech in 2015 on ‘the tragedy of the horizon’, the Bank has been working with many other organisations, with our particular focus on financial stability, from physical and transition risks. Our expectations for firms were set out in Supervisory Statement 3/194 and firms contribute to work on their implementation plans. Firms should consider how they can assess the climaterelated financial risks associated with their clients and counterparties and have a clear high-level strategy for adapting to the range of potential climate outcomes. The PRA is mindful of the need to take a proportionate approach and accept that smaller firms do not have the resources to develop as sophisticated an approach as larger firms.

This is a riskier phase of an infrastructure investment but banks are good at doing this. However, the new capital standards for banks do not make it attractive for them to hold on to these loans on a long term basis, even though the projects at the brownfield stage are operating smoothly. At the same time, there are many other investors, including insurance and pension funds, which may be looking for less risky investments that can produce steady long-term cash flow. Therefore I can see a good opportunity for banks to offload their loans to these long-term investors. However, it is easier said than done. There are many issues that need to be tackled. Just to name a few: the large transaction size of infrastructure loans makes concentration risk of (a) collateral a more prominent issue to be addressed, say as compared to the securitisation of a portfolio of mortgage loans comprising a large number of loans but with each being relatively small in size; apart from being large in size, infrastructure loans tend to be significantly less homogenous than the other types of asset for securitisation.
Towards the end of 2011, with a decision unprecedented in the history of the euro, the ECB’s Governing Council decided to conduct two three-year refinancing operations. At the end of February, or when the second three-year operation was completed, the net increase in loans granted to counterparties was around € billion. The motivation for the two operations can be summarised by the following strategic view. A central bank is mandated with the crucial task of ensuring the sufficient supply of liquidity to sound bank counterparties in return for adequate collateral. In normal times, “sufficient liquidity” means a volume of refinancing in line with the need for banks to meet the obligatory reserve requirements and the financing of other independent factors which explain the growth over time in the demand for money. In times of increased financial instability, “sufficient liquidity” indicates a volume of available central bank money which avoids the risk that – under such market conditions – the temporary inability of banks to provide refinancing leads to insolvency and thus to a situation of widespread default. In neither of the two cases – normal times or crisis periods – can the central bank be considered responsible for the survival of bank counterparties that are close to bankruptcy.

Central bank credit to banks has been a complement to – rather than a substitute for – private credit: in the first quarter of this year, the amount of bonds issued was equal to the total issued in 2011 as a whole, which shows that the operations, at least in the first few months of the year, provided the markets with liquidity, reactivating a number of credit channels. The two LTROs removed one of the obstacles – the only one over which the ECB has any influence – to credit, namely a lack of liquidity. The ECB cannot do anything to make up for a lack of capital, to change intermediaries’ risk perceptions, or to remove other structural obstacles present at national level. More generally, the size and complexity of the two LTROs is such that it will take time for all of their positive effects on the euro area economy to be fully felt. However, it is essential for growth and employment that credit institutions regain their ability to provide refinancing to the economy. 8  BIS central bankers’ speeches
But a spread is only defined around some mid-price, whether market or model-determined – and the former may simply not exist in dysfunctional markets, leaving it hard to avoid being a price setter, whether you like it or not. We found ourselves coming close to this in our index linked gilt purchases, where a near-complete lack of liquidity required us to set an additional level of reserve pricing in levels terms (a ‘reference yield’ below which we  Page 12  would not buy) to ensure we both removed the threat of renewed dysfunction while also preventing yields from falling to levels that would leave us acting as the entire market (Figure 5). That proved workable for a few days – whether it could be applied over longer periods is an important question for future reflection. Questions for future research Let me end with some questions for future research, drawing on points I’ve made today: First, we need a clearer sense of how much market dysfunction societies are willing to tolerate – whether defined in terms of a certain spread around risk-free rates, a certain level of liquidity, or the absence of unstable firesale dynamics. And, we need a clearer sense of the extent to which this tolerance should be achieved through self-insurance by market participants (in particular non-banks) – with the residual presumptively falling to public authorities to backstop through tail risk insurance.

Collateralised lending programmes targeted directly at an appropriate set of non-banks would be materially less risky, to public money and to market incentives; they would pose fewer potential conflicts with monetary policy; and could be put in place ahead of potential shocks, with well-understood operational, collateral and pricing terms. Developing viable options for such facilities is therefore a high priority on our work programme. There are at least three key sets of operational design questions to tackle. First, which non-banks do you need to be able to get liquidity to, in order to stem potential systemic shocks effectively? Second, are those non-banks able to borrow (or can we devise mechanisms to allow them to do so), both in terms of their legal remits, and in terms of their operational arrangements? And, third, what terms and conditions would we want to impose on borrowers, including pricing, collateral requirements and any access conditions – including regulatory status? I have to say that my instincts are that finding a workable group of non-bank entities that are (a) collectively systemically important enough to allow us to maintain stability, (b) legally and operationally able to borrow at sufficient size and speed, and (c) willing to meet the conditions of a borrowing programme, could be challenging. But some central banks, for instance the  Page 9  Canadians,[14] have made important progress in this area – and we will be learning from them and others.
This has been recognised in the view of most central banks in advanced economies who have made it clear that when policy rates go up they are likely to do so slowly and to levels materially below those we saw before the crisis. Second, while I believe central banks do have the tools to offset shocks to the real economy and to fulfil their mandates, these tools become increasingly more complex in their effects in a world in which the natural rate is low. I would briefly mention two aspects of this. Monetary policy at very low levels of the natural rate can have implications for the financial sector – both in the way the sector is able to transmit monetary policy and in broader impacts on the price of financial assets. 8  All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx  8  These effects can be managed. In August, the MPC specifically addressed the implications of its recent policy package on banks’ interest margins; it took action to prevent these jeopardising the transmission of its policy stimulus. And, to the extent that monetary policy at these levels has an undesirable impact on financial assets and indebtedness, the development of macroprudential policy is intended to address these directly and more generally to make the financial system more resilient to shocks. On a different note, one cannot ignore that monetary policy has a distributional impact. All sectors of the economy and all parts of society benefit from price stability and lower volatility in economic growth.

It can be very painful for both the economy and society to correct entrenched inflation – as I learned when I left this university in the mid-1970s – or indeed entrenched deflation. But monetary policy works through many channels in the economy. It affects borrowers and savers. It affects wealth – the value of houses and financial assets. It affects jobs and pay. And the impacts on individuals can be difficult to disentangle. Low rates, for example, can increase housing wealth and the value of pension investments while reducing the return on savings accounts. And to the extent that by smoothing the volatility of output monetary policy can prevent the adjustment to economic shocks leading to more persistent damage to the economy, it can prevent longer lasting loss of jobs and loss of pension values. A pension, after all, is in the final analysis a claim on the future economy – it is an investment, public or private, that has to be paid out of future revenues, dividends, capital values and taxes. However, these effects can be felt more powerfully when policy rates are at what appear to be very high or very low absolute levels. We are of course explicitly mandated to make difficult trade-offs. Most notably, when inflation is off track, they have to balance the speed with which it is brought back to target against the impact on growth.