At the same time, uncertainty about the effect of interest rate changes has increased, suggesting a cautious approach to interest rate setting. 4/7  BIS central bankers' speeches  The rise in interest rates affects consumption through various mechanisms. Some of these mechanisms operate with a lag. Household disposable income will be affected by slightly more subdued growth in employment and wages. Higher interest rates may also curb the rise in house prices, resulting in a smaller rise in housing wealth than would otherwise have been the case. Other consequences of an interest rate increase will have a more direct impact on private consumption. First, higher interest rates push up the cost of consumption today relative to consumption tomorrow. Debt-financed consumption becomes more costly, while saving provides a higher return, pointing towards lower consumption today. Credible signals that the interest rate will remain at a higher level ahead may amplify this effect. Second, the interest rate increase has a direct impact on household disposable income. The strength of this channel will depend on the overall debt level and the distribution of debt (Gerdrup et al (2018)). While higher interest rates means increased expenses for some, interest income increases for others. If housing wealth is disregarded, Norwegian households as a whole are in a net debt position. As higher interest rates means higher net interest expenses, a higher interest rate level will in isolation reduce household purchasing power. Chart: Household debt has increased The elevated debt level has amplified this effect.

An integrated money market exists for liquidity transfers in euro; banks are inter-connected in a common payment system infrastructure; and wholesale securities market activities and corporate finance services do not recognise geographical borders. However, at the retail level, international banks must still treat each country as an individual market. This is because of localised demand and country-specific banking products, and differences in conduct-of-business and consumer protection rules. The remaining differences in regulatory and supervisory practices can also play a role. I believe that few institutions understand this as well as you do, as you still have to cope with the task of navigating business through various national environments. I should like to explore this double feature of euro area banking today. On one hand, there is the challenge for central banks and supervisory authorities to respond to the emergence of a common wholesale banking system in order to maintain financial stability. On the other hand, greater integration, also in the retail field, remains an important policy objective. I should like to address the two aspects in turn, starting with wholesale banking and then moving on to the retail side. A common wholesale banking system I share the view that a common currency and a common central bank actually determine a unified banking system. In a nutshell, access to a common source of central bank liquidity and a common money market – as well as confidence in the common currency – create strong interconnections between all banks operating in the single currency area.