samchain/econo-pairs-v1 huggingface dataset:
The proportion of new owner occupier mortgage loans at loan-to-income ratios just below 4.5 has almost doubled in the past 5 years. Almost a fifth of new mortgages now fall into this bucket (see chart 4). In part because of our guards, households’ mortgage debt servicing burdens remain very low. Only 1.4% of households spend 40% or more of their income servicing their mortgage debts. And even if interest rates were to be at 2%, that share - at 1.9% - would be no more than it has been on average in the past. 7  For example, Bunn and Rostom (2015) find evidence that more highly indebted groups of households made larger cuts in spending following the financial crisis. See www.bankofengland.co.uk/working-paper/2015/household-debt-and-spending-in-the-uk 8 A loan to income limit, setting out that no more than 15% of new mortgages can be issued at loan to income ratios of 4.5 or higher; and an affordability test, under which lenders consider whether new mortgagors could still afford their mortgage if they switched to the mortgage reversion rate and interest rates were 3 percentage points higher. 7  All speeches are available online at www.bankofengland.co.uk/speeches  7  So there is no flashing warning light here telling us to pull over urgently. There is, perhaps, the light that reminds us the car is due for a service. Developments in corporate credit, consumer credit and in the mortgage market could be signs of a more generalised pick-up in risk taking.

With default rates in downturns on credit card and personal loans some seventeen times higher than on mortgages, this can be risky for the lenders. 6  All speeches are available online at www.bankofengland.co.uk/speeches  6  What lies beneath is of greater note. Because underneath that calm surface, a sharp slowing in credit demand from buy-to-let investors after a set of tax changes, and subdued credit demand from new buyers as incomes have been squeezed, has masked the effect of looser credit supply to owner occupiers. Mortgage rates have fallen materially relative to Bank Rate, especially at the riskier end of the lending spectrum (see chart 2). And lenders are now prepared to take a bit more risk. Mortgage loan to income ratios are rising. Households with high mortgage debt make cutbacks in downturns to keep paying the mortgage. More of 7  these households in an economy typically means deeper recessions (see chart 3). That’s why, when it comes to mortgages, the interests of the real economy can be served by guarding against excessive risk taking by lenders. We put in such guards, as insurance, back in 2014. They’re centred on a limit on new mortgage lending at more than 4.5 times the borrower’s income and on testing of the affordability of a mortgage to a borrower even if mortgage rates were in the region of 7%. 8  With lenders now prepared to take more risks, those guards are now working. Loan-to-income ratios have increased and are now hitting up against them.
The euro area expansion will continue to be supported by favourable financing conditions, further employment gains and rising wages, and the ongoing – albeit somewhat slower – expansion in global activity. This assessment is broadly reflected in the March 2019 ECB staff macroeconomic projections for the euro area. These projections foresee annual real GDP increasing by 1.1% in 2019, 1.6% in 2020 and 1.5% in 2021. Compared with the December 2018 Eurosystem staff macroeconomic projections, the outlook for real GDP growth has been revised down substantially in 2019 and slightly in 2020. The risks surrounding the euro area growth outlook are still tilted to the downside, on account of the persistence of uncertainties related to geopolitical factors, the threat of protectionism and vulnerabilities in emerging markets. According to Eurostat’s flash estimate, euro area annual HICP inflation was 1.5% in February 2019, after 1.4% in January, reflecting somewhat higher energy and food price inflation. On the basis of current futures prices for oil, headline inflation is likely to remain at around current levels before declining towards the end of year. Measures of underlying inflation remain generally muted, but labour cost pressures have strengthened and broadened amid high levels of capacity utilisation and tightening labour markets. Looking ahead, underlying inflation is expected to increase over the medium term, supported by our monetary policy measures, the ongoing economic expansion and rising wage growth.

To sum up, a cross-check of the outcome of the economic analysis with the signals coming from the monetary analysis confirmed that an ample degree of monetary accommodation is still necessary for the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term. 2/3  BIS central bankers' speeches  In order to reap the full benefits from our monetary policy measures, other policy areas must contribute more decisively to raising the longer-term growth potential and reducing vulnerabilities. The implementation of structural reforms in euro area countries needs to be substantially stepped up to increase resilience, reduce structural unemployment and boost euro area productivity and growth potential. This is particularly important in view of the overall limited implementation of the 2018 country-specific recommendations, as recently communicated by the European Commission. Regarding fiscal policies, the mildly expansionary euro area fiscal stance and the operation of automatic stabilisers are providing support to economic activity. At the same time, countries where government debt is high need to continue rebuilding fiscal buffers. All countries should continue to increase efforts to achieve a more growth-friendly composition of public finances. Likewise, the transparent and consistent implementation of the European Union’s fiscal and economic governance framework over time and across countries remains essential to bolster the resilience of the euro area economy. Improving the functioning of Economic and Monetary Union remains a priority.
In the previous years, the view had become established that monetary policy served financial stability best by focusing on price stability. This was linked to the widespread opinion that monetary policy should not “lean” against a growing bubble on the equity or real estate markets. It should wait until the bubble had burst before intervening and cleaning up. The “lean or clean” question was reassessed as a result of the financial crisis. It became evident that financial stability was not necessarily guaranteed, even where monetary policy – as measured by the criterion of price stability – was very successful. Moreover, the damage caused when a bubble bursts can be so enormous that it is not easily remedied using monetary policy instruments. To simplify things somewhat, we can distinguish two ways in which central banks can attempt to make a more substantial contribution to financial stability. The first is to steer monetary policy decisions more strongly in the direction of financial stability. The argument against this is the danger of overburdening monetary policy. One lesson from the years of the Great Inflation was that the overall result is not improved when monetary policy tries to achieve too many goals simultaneously. The credibility and success of monetary policy will inevitably suffer as a result. For this reason, the second option has much in its favour.

Secondly, I would encourage supervisors to consider how the three pillars of Basel II could already be enhanced in their jurisdiction. Supervisors do not need to await their formal adoption of Basel II to start introducing or using the principles of the three pillars. On the contrary, incorporating those principles is excellent preparation for adopting Basel II in the future. For example, supervisors might be encouraged to move towards a system of risk-based supervision, developing skills in assessing the quality of a bank’s risk management and its ability to assess risk exposures. At the same time, banks could be reminded of their responsibility to develop their own processes for evaluating their capital needs and a strategy for maintaining their capital levels, in line with the principles of Pillar 2. With regard to the principles of market discipline in Pillar 3, supervisors in some countries may wish to focus initially on ensuring a baseline level of disclosures across all banks. This might include discussing with banks, investors and other users of financial information their information needs and the tools available so that supervisors can tailor requirements accordingly. In my view, these two preliminary stages will provide an excellent preparation for the “final” stage to move to Basel II. The Basel Committee welcomes the efforts that so many countries have already undertaken to enhance the quality of bank supervision and to encourage prudent management in the banking sector. We support your work and would like to contribute to your efforts.
We also give emphasis to predictability and transparency. Normally, the interest rate is set with a view to achieving inflation of 2½ per cent at the two-year horizon. This time horizon usually provides a reasonable balance between stabilising inflation on the one hand and smoothing fluctuations in output and employment on the other. 1  See Akram, Farooq Q. (2003): “Reell likevektsvalutakurs for Norge” (Real equilibrium exchange rate for Norway), in Norsk Økonomisk Tidsskrift 118, pp. 89-112. 2  BIS Review 25/2004  If demand for goods and services is high and there is a shortage of labour, there will normally be prospects of higher inflation. When the interest rate is raised, demand is dampened and inflation is kept in check. If demand is low and unemployment rises, there will be prospects of lower inflation. The interest rate will then be lowered. The inflation target thus represents a framework, not an obstacle, for monetary policy to contribute to stability in output and employment. Section 1 of the Regulation on Monetary Policy states that in addition to sustaining the level of inflation at approximately 2½ per cent over time, monetary policy shall also contribute to stable developments in output and employment. The mandate therefore establishes a flexible inflation target for monetary policy where variations in output and employment are also given emphasis.

In relative prices, the real exchange rate is now about 3.5 per cent weaker than the average since 1970, whereas it is approximately 2.5 per cent stronger than its historical average measured in terms of relative labour costs. The exchange rate in the long term There has been divergence between cyclical developments in Norway and other countries. This was most pronounced in the 1980s when we had a strong upturn while Europe was in a recession. Although the economic cycles have been somewhat more similar over the years, there is still a time divergence. While the global turnaround took place in 2000, with a subsequent reduction in interest rates abroad, the Norwegian economy continued to show a high level of activity. Towards the end of the upturn, the economy was facing labour shortages, accelerating wage growth and a sharp increase in household consumption and debt. Interest rates in Norway remained high and the interest rate differential gradually widened. There have also been other differences between cyclical developments in Norway and other countries. The expansionary period in Norway led to strong wage growth from 1998 to 2002. The upturn in the global economy at the end of the 1990s was largely driven by business investment and wage growth was moderate. Wage growth in the Norwegian business sector from 1998 to 2002 was higher than the level that over time is consistent with the inflation target and with normal productivity growth.
Recent experience around the world suggests that the potential of a financial centre cannot be maximized unless it possesses another essential attribute. That other ingredient is stability and it is this aspect that I propose to explore today. Ensuring financial stability is a statutory responsibility of the Central Bank of Malta. The Bank is thus obliged to participate actively in the maintenance of a stable and efficient financial system and to contribute towards its development. This applies not only to the payment and settlement system, of which the Bank is the regulator, but to the entire financial system. The Bank has an on-going role to play in assessing the robustness of the system. It must draw attention to any problems and ensure that these do not in any way impede the functioning of the financial markets as efficient providers of capital for companies and households. The Bank’s approach is therefore to consider the general risks to the system rather than the situation of individual credit and financial institutions. The latter is the task of the Malta Financial Services Authority (MFSA), which has successfully assumed, over the last ten years, full responsibility for the supervision of institutions providing financial services. Why central banks promote financial stability There are several reasons why the maintenance of a healthy financial sector is an essential function of central banks, and this irrespective of their involvement or otherwise in regulation and supervision.

In particular, the activities and institutions which the Bank and the Authority will be expected to monitor will become more complex as the number of financial intermediaries with a presence both in Malta and in other countries, either directly through the establishment of branches or subsidiaries, or indirectly through the provision of cross-border services via the internet or otherwise, continues to grow in the light of the incorporation of EU passporting rights in Maltese legislation. The coming into effect of Basle II and, at the EU level, CAD III will be significant factors in this regard. At the same time, the tendency of companies to seek multiple listings in different securities markets means that interest rates and stock market valuations in one country will increasingly mirror those in other countries, even though the underlying economic fundamentals of that country might warrant some divergence in such variables. Indeed, as has been the experience of other countries, the trend towards consolidation and merger activity in the various segments of the market, from banking and the selling of insurance and investment funds to the provision of payment services and trading facilities, will lead to a situation where the institutions to be supervised will vastly exceed the financial resources and technical expertise available to supervisors and central banks.
Chart 13: Euro area inflation, output gap and employment growth in %  Chart 14: Euro area headline inflation and core inflation (in percent) 2.5  3.00  2.50  2.0  2.00 1.50  1.5  1.00 0.50  1.0  0.00  -0.50  Output gap, as % of potential  Inflation, average consumer prices  -1.00  Employment, y/y growth  0.5  -1.50  0.0  -2.00  Inflation, average consumer Core inflation, average (change prices (change in %) in %)  -2.50 2000-2008  2009-2014  2015-2019  Source: IMF WEO Database, October 2019. 12  2002-2008  Source: Eurostat. 2009-2014  2015-2019  The debate focused on several important issues related to the labour-costs pass-through, whether it has weakened in intensity in recent years and reasons behind these potential changes. In general, the findings reveal that the impact of wages on inflation might be less pronounced than in the past and relates to three important cyclical and structural factors. The first one relates to more subdued inflation and inflation expectations. The second one relates to the corporate profit margins that tend to be pro-cyclical, with their capacity for absorbing the rise in labour cost changing across the cycle. The third one is a factor of a more structural nature, linked to the rising competitive pressures and overall rising globalization.

These include the possibility of premium competition in the non-life sector, longevity risk in the life sector, and the possibility, albeit diminishing, of an influenza pandemic. The chart on the left on slide 12 portrays the performance of the insurance sub-sectors relative to the Dow Jones EURO STOXX. Whilst the impact on the reinsurance sub-sector of the damage caused by natural catastrophes is evident, other sub-sectors appear more resilient. The chart on the right on slide 12 shows the median expected default frequency and average subordinated debt spread for euro area insurance companies. Both measures of risk in the sector have reached new lows since 2001, indicating that market participants see an improving resilience in the sector. The current Review contains for the first time a specific section dedicated to assessing developments in the global hedge funds sector. The pace of growth of the capital under management of global hedge funds, which had moderated in the course of 2005, fluctuated rather sharply in the first months of 2006, partly due to the mixed performance of most strategies in the last quarter of 2005 and improved results in the first quarter of 2006. After several quarters of reduced inflows into the hedge fund sector, and an outflow in the last quarter of 2005, inflows re-bounded in the first quarter of 2006 as shown by the chart on the left on slide 13.
Banks are in a special position. They transform short-term deposits into long-term loans. They are responsible for payment settlements, and bank deposits serve as a means of payment. The volume of amounts outstanding in the interbank market is sizeable. As a result, problems in one bank may rapidly spread to other banks. The financial strength of banks is thus important for financial stability, even more so in countries where banks are the main financial intermediaries. Long-term profitability has a decisive influence on financial strength. Obviously, there are many factors that can influence the future profitability of banks. The topics you will discuss during these two days are of great importance. Financial unrest spreads through payment and settlement systems. These systems can also be a source of risk. This occurs when banks credit customers before they have received settlement from the payer bank. Payment and settlement systems must thus be designed to reduce settlement risk. This is an issue high on the agenda of most central banks. Interdependence of monetary and financial stability The objectives of monetary stability and financial stability are interdependent. High - and thereby in practice varying - inflation and unstable exchange rates can threaten financial stability through several channels. First, it is more difficult to assess the risk of an investment project. Inflation makes it difficult to differentiate between a change in prices for goods or service and a change in the overall price level. It makes it more difficult to determine the discount rate to be applied.

There is no consensus on how to handle this dilemma. Central banks have avoided targeting specific asset price levels. Nevertheless, history provides some examples of when more emphasis might have been placed on asset price developments in the formulation of monetary policy.1 Structural changes in the financial sector have the strongest impact on monetary stability through the way it may alter the transmission mechanism of monetary policy. For example, if structural changes increase competition in the banking sector, banks may adjust their retail interest rates more rapidly in response to changes in central bank and money market rates. This means that monetary policy may influence savings and investment decisions more quickly. The four largest Nordic countries have chosen different monetary policy regimes: •  Finland is part of the euro area;  •  Denmark is a member of ERM II;  •  Sveriges Riksbank targets inflation;  •  whereas Norges Bank focuses on long-term exchange rate stability. I want to emphasise that the objectives of monetary and financial stability can be achieved by different regimes, including the ones chosen by the Nordic countries. Denmark has for several years run a successful fixed exchange rate regime. Denmark’s success must be seen in the light of a combination of factors. First, ERM membership and Denmark’s long-term commitment to a stable exchange rate have enhanced confidence in the current regime. Second, fiscal policy has successfully supported the fixed exchange rate.
It is fairly understandable that certain EU member states support the current, rather non-transparent way of modifying the institutional set-up: it is the only way for them to maintain or even strengthen the draconian mix I just described. 2  BIS Review 165/2009  Given that European integration is taking place in this “European” way (in the bad sense of the word), it is no wonder that standard democratic politics has not left the national level: all formally EU-wide ideas are always translated in each individual member state into the local political context; there are no true EU-wide political parties, no true EU-wide politicians, no true EU-wide media. The debate in EU institutions rarely follows the lines that we are used to in standard political debates, such as whether we want more freedom or more redistribution. Instead, most time is spent, as I said, on procedures and institutions. The official efforts at gradual political integration thus give the impression of squaring the circle. These awkward traits in politics at the EU level then lead to some perverse implications. On the one hand, measures which would help Europe to retain a strong economic position – and here I mean especially liberalisation of markets and trade – take years or even decades to implement: the single market for services still does not exist and even the single market for labour still has fundamental exemptions.

Since it takes time – we allow for a time horizon of one to two years before the transmission mechanism has worked through the economic system – we have to form an opinion of the state of the economy in the long run. Predicting the future is difficult for many reasons, not just due to statistical shortcomings but also because the economy is changing all the time. The economy can be hit by different kinds of shocks, e.g. the increased electricity prices when there was a shortage of water in Sweden’s reservoirs, and  BIS Review 10/2005  3  the price of meat and other food when cows in Europe were affected by a number of diseases. It is difficult to determine early on what changes in the economy are temporary and what are permanent. Another factor complicating the picture is that inflation expectations in society greatly influence price and wage formation, and thereby inflation. In other words the car – to continue with the analogy – has a fogged windscreen, a speedometer that is very difficult to read and pedals that sometimes are sluggish and sometimes easy to push down. How can we make the economy go at an appropriate speed?