In this case, small changes in the reference rate cause relatively large adjustments to long-term rates – the monetary policy transmission mechanism is working. The inflation risk premium and capital market rates are low. Lower interest rates mean lower funding costs for the government. However, if the government seeks capital market funding, another factor comes into play in addition to inflation expectations and the inflation risk premium: the credit risk premium. The more sustainable the public finances, the greater investor confidence will be. This leads to a lower credit risk premium. This makes public finances more affordable, which in turn reduces credit risk. Monetary policy also benefits, because the transmission of monetary policy stimuli is not impeded. In this way, sustainable monetary and fiscal policy together achieve greater stability, less uncertainty and lower rates. Let’s now turn to the real economy (cf. chart 3). On the one hand, lower interest rates mean lower funding costs for companies and private households. This provides favourable conditions for economic growth but does not create it per se. Growth itself is founded on productivity gains, population growth and capital formation. A stability-oriented monetary policy allows households and companies to make their economic decisions (work, consumption, saving and investment) in a less uncertain environment. In this way, the  1  Swiss Federal Constitution, Art. 126 (budget): “The Confederation shall keep its expenditure and receipts in balance in the long term”; art. 100 (economic policy): “In their budgetary policy, the Confederation, Cantons and Municipalities shall take into account the economic development”.

Banks and microfinance institutions are now obliged to disclose to borrowers the total loan cost to rule out situations where borrowers end up paying more than agreed under seemingly clear terms. 2/5  BIS central bankers' speeches  Running ahead, we think that there is a need for more stringent legislation in that area, considering that banks have adjusted and some of their ‘offerings’ circumvent the requirement of disclosing the total loan cost, that is the amount they are required to make clear to the borrower. Against the background of economic recovery, disbursements of unsecured loans have accelerated. As I have said, this is driven by high inflation expectations (when people expect higher inflation, they try to buy goods on credit) and fairly attractive interest rates. Banks like this situation, without doubt. They are looking for ways to circumvent our restrictions. For example, we have seen a rise in the share of consumer loans (I mean consumer loans, not mortgage loans) with more than five years’ maturity (from the pre-pandemic 11% to 21% in the second quarter of this year). On the one hand, by extending loan maturity, banks reduce monthly payments, making a loan seemingly more affordable to borrowers. Yet, the total amount of debt per borrower is increasing. This is normal for a mortgage that is issued for a long period (and with much lower rates), but those long periods for unsecured loans are unreasonable and are set to entail problems. We already see a deterioration in consumer lending standards.