Spain is trading between –45 bps and –50 bps. Italy is now trading below –40 bps1. And for Austria, Belgium and The Netherlands, rates have been moving downwards as well. One could say that whereas in the past the repo market was largely characterised by “collateral chasing cash”, today the main dynamic in some markets appears to be “cash chasing collateral”. The evolution of repo rates for different collateral classes over reporting dates suggest that the old pattern still exists in parallel with the new. As I will argue below, this observation provides a key to understanding the roots of these developments. New dynamics in the short term funding markets unsurprisingly lead to debate in the financial industry. There are concerns about short-term borrowing costs swinging sharply at the end of reporting periods, creating volatility and potentially spilling over into government bond markets – an effect we have indeed seen for core general collateral (GC) collateral. And some observers fear collateral scarcity might herald more general disruptions to the “plumbing” of the financial system, which would be especially problematic given ongoing structural changes in financial intermediation. Activity is after all shifting increasingly from banks to non-banks, and marketbased finance is, by and large, organised around collateralised lending. Perhaps inevitably, some point the finger at monetary policy, and in particular at the side-effects of the ECB’s asset purchase programme. The substantial creation of liquidity by the APP is argued to have pushed unsecured lending rates to the deposit floor, causing secured lending rates to fall even lower.

Norwegian companies have also been able to be considerably bolder in undertaking new assignments and investments knowing that they can procure labour throughout Europe. In addition to increased labour inflows from Poland, Lithuania and other central European countries, we have long benefited from inflows of labour from Sweden. Many workers are on temporary assignment and their consumption is primarily concentrated in their home country. The Norwegian economy has seen a net capacity increase. Third, the Norwegian business sector has been quick to integrate information technology. This applies both to companies competing on international markets and those supplying goods and services to the domestic market. In comparison with other countries, it is particularly productivity gains in banks and other service sectors that stand out. Examples are automated processes and swifter payments in the financial industry and improved inventory and management systems in commerce and transport. In Norway, monetary policy is oriented towards low and stable inflation. The operational target is consumer price inflation of close to 2.5 per cent over time. We operate a flexible inflation targeting regime. Both variability in output and inflation are given weight in interest-rate setting. BIS Review 15/2007  3  A decline in import prices, ample supply of labour and high productivity growth have boosted the growth potential of the Norwegian economy and led to very low inflation. Against this background, it has been appropriate to stimulate demand for goods and services. We consider a normal real interest rate to be in the order 2½ to 3½ per cent.