samchain/econo-pairs-v1 huggingface dataset:
Inflation and energy prices In these ways the losses in credit markets are already contributing to slowing growth; the questions are by how much and for how long? The danger that they could turn a necessary modest slowdown into a deeper and more painful downturn is clear and, of course, that would dampen inflationary pressures. That was a key factor in my decision to vote for a cut in rates in November and December. But the current situation is complicated by emerging upside pressures on prices. This inflationary pressure is coming largely from outside the UK, reflecting in part increased demand from countries like China where output growth has been both rapid and commodity intensive. That has led to renewed strength in commodity prices (Chart 11), with oil rising as high as $ a barrel and some agricultural foods reaching record highs in dollar terms. This has already increased the prices of imported goods, and that effect has been amplified recently by the fall in sterling. In turn, it is putting upward pressure on the sterling prices set by domestic producers for crude oil and wholesale gas and electricity. And, in contrast to the past, demand from emerging economies may mean that commodity prices prove resilient to slowing growth in the industrialised economies. The appropriate monetary policy reaction to upside pressures on prices coming from outside the economy (such as an energy price shock) depends on how households and businesses react to that shock – in other words, on so-called “second-round” effects.

With pressures on their capital and new capital expensive where it is available, banks are likely to attempt to increase their margins and to slow down new lending, thereby reducing their capital requirements, for example by tightening non-price terms and conditions on new loans. One factor which regulators are watching carefully at present is the impact of the shift this month to the Basle II system of capital requirements for European banks. While Basle II improves on its predecessor and removes many undesirable incentives, it retains some procyclical features and any transition needs to be managed carefully. 8 The impact on expectations and confidence The other channel by which the financial market turbulence is likely to have macroeconomic effects is by prompting more cautious behaviour by households and firms. This might simply reflect uncertainty about the future. Firms may temporarily postpone investment because of greater uncertainty about the future path of demand. We saw an effect like this after 9/11 for example. But it might also reflect a revision by households and firms about the sustainable path of income and wealth in the coming years. The change in expectations may reflect the higher costs of borrowing and a higher risk of unemployment. Again a reduction in confidence about future growth may lead directly to lower consumption and investment. It is also likely to affect equity and property markets. Potential buyers may decide to wait before purchasing if they sense that there is a chance that prices may fall. Such behaviour can be self-fulfilling.
In recent years, both the percentage of people at work and the hours worked per person have fallen and thus provided a negative contribution to the change in the total number of hours worked in the economy. The fact that mean working time has fallen is partly due to a decline in overtime and normal working hours. The reason behind this development is not entirely clear. Cyclical effects as well as the effects of taxes and benefits are possible explanations. Seen in a longer-term perspective ahead, it is likely that households will tend to want to reduce the mean working time per person so as to use some of their increased prosperity in the form of more leisure time. So what conclusions can we draw regarding developments in the total number of hours worked in the economy on the basis of this review of the various components? Unfortunately, the prospects are not so bright if no measures are taken to improve the situation. In a long-term perspective, the demographic development is very unfavourable because the percentage of the population of working age is decreasing. The problems will be exacerbated if the rise in early retirement and long-term sick  2  The Swedish National Social Insurance Board, “Vem önskar lämna arbetslivet med förtidspension?”(Who wants to leave work on a sick pension? )’, RVF Analyserar 2004:7, and Statistics Sweden, Välfärd (Welfare), No. 1 2003.

7  With a 10% deposit, that means they’d be buying a home worth 4.5 times their income. In short, the high levels of both mortgage debt and house prices in this country are a reflection of the high cost of housing in general. They are not the result of an addiction to debt or of reckless mortgage lending. 8  So Britain doesn’t have a high level of consumer debt. It doesn’t have a debt-driven housing market. And as we’ve seen, it doesn’t have rapid growth of credit overall. Debt Strikes Back isn’t yet screening again. But there are pockets of the galaxy where it may be. In the past year, outstanding car loans, credit card balances and personal loans have increased by 10%. Household incomes have risen by only 1.5% (Chart 8). On credit cards and personal loans, terms and conditions have become easier. The average advertised length of 0% credit card balance transfers has doubled to close to 30 months (Chart 9). Advertised interest rates on £ personal loans have fallen from 8% to around 3.8% today, even though official interest rates have hardly changed (Chart 10). These are all classic signs of lenders thinking the risks are lower. 6  Department for Communities and Local Government (2017) ‘English Housing Survey, Headline Report 2015-16’ 2 March. https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/595785/2015-16_EHS_Headline_Report.pdf 7 The effective mortgage interest rate was last at 7% in 2001.
That can, nevertheless, still leave room for tension between the need to moderate the upswing in domestic demand in order to meet the Government’s inflation target (of 2½% or less) not this year, but in 1998 and beyond on the one hand, and unwanted strength of the exchange rate on the other. There is no easy monetary policy answer to this dilemma. How far it persists depends upon just why the exchange rate suddenly strengthened as it has; and that is not easy to explain in terms of developments in the UK alone. Some of the suggested influences may well prove to be exaggerated or indeed reversible. This may be true, for example, of the rise in the oil price. It may be true, that expectations about a prospective relative rise in UK, and US, interest rates, reflecting the relative strength of our cyclical positions compared with those in Japan or continental Europe, are overdone, and they should in any event reduce as recovery takes hold in those other countries. And present market perceptions of the euro as a potentially weak currency if the Maastricht convergence criteria are not rigorously enforced, may also come to be seen to be exaggerated. There is in fact some suggestion, in currency options prices, that markets see a larger downside than upside risk to sterling against the DM in the course of this year. In the meantime, policy judgments are likely to remain unusually difficult.

A sharp pick-up in the rate of growth of the money supply in 1995 provided an early indication that demand growth was likely to accelerate. And money supply growth has remained strong throughout the whole of the past year. Faster growth of consumer spending became evident in the first half of 1996 and has been sustained. And from the middle of last year this began to feed through into output - which was initially held back, and is possibly still being affected by a run-down of stocks. Now the fact is that no-one can tell you with any great confidence just when the increase in demand is likely to begin to create economic imbalance and spill over into rising inflation. But we can be reasonably certain that money supply growth at around 9-10% a year, as we have seen it now since the beginning of last year, and growth in consumer spending at nearly 4% a year, as we have seen over the last year, cannot be sustained for long consistently with the Government’s inflation target in the medium term. And there are signs in the recently more rapid tightening of the labour market and in the gathering recovery in the housing market, for example, that demand may be strengthening. BIS Review 5/1997  -2-  That, essentially, is why the Bank has been arguing that we will need at some early stage a modest pre-emptive tightening of monetary policy.
The gradual shift in the policy towards – within the framework of the price stability objective – also taking into account fluctuations in economic activity meant that this focus on inflation at a particular point in time could be overinterpreted. It is the entire path for inflation and the real economy that is actually important in the monetary policy decisions, not merely the levels at the two-year horizon. Nor is it possible to ignore what happens beyond this horizon. The world will not come to an end in two years’ time. Interest rate and inflation forecasts can be interpreted in the same way as before to the extent that if the forecast for inflation two years ahead is above the target, it will normally mean that the repo rate will need to be adjusted at a faster rate than market expectations assume. The reverse applies, of  3  More exactly, it is assumed that the repo rate will follow implied forward rates, which can be gathered from the yield curve for debt securities with different durations. Implied forward rates do not exactly reflect market expectations of future repo rates as a result of the existence of term premiums and other forms of risk adjustment, but they provide a good approximation. For a more detailed description, see the box “Longer-term forecasts under the assumption that the repo rate evolves in line with implied forward rates” in Inflation Report 2005:2 and Alsterlind, J. & Dillén, H., “Monetary policy expectations and forward premia”, Sveriges Riksbank Economic Review, 2005:2.

Annual average dynamics of unit labour costs in the second quarter of 2007 in CEE accounted to 8 per cent and in the group of Baltic and Balkan states the figure was over two times higher. This shows that sooner or later (rather sooner) enterprises will stop cutting their profit margins and will be forced to pass growing operational costs on consumers. 3. Productivity growth. We live in a global knowledge economy, which is driven by innovation – technological, business-process or customer related. The crucial factor to succeed in the global knowledge economy is the country’s ability to develop intellectual capital. Only those who understand the importance of innovations for growth will thrive and prosper in the coming decades. Unfortunately, CEE region lags badly behind the leaders in terms of its current and future ability to generate innovation. One of indicators measuring current ability to innovate is the number of researchers. In the mid-1990s CEE-4 (the Czech Republic, Hungary, Poland and Slovakia) and NIEs regions had similar number of researchers per million people, while two years ago NIEs had almost twice as many persons employed in R&D per million people in comparison with CEE-4. Future knowledge potential of particular country or region can be measured by tertiary enrolment ratio. Tertiary enrolment ratio in the CEE-4 countries improved to 50 percent in 2004, but still remains well below 62 percent in the EU-15 and 82 percent in the United States.
Reforms in the conduct of the monetary policy have granted greater flexibility to banks to determine both the volume and terms of lending and deposits. The Bank of Albania has provided all necessary conditions to ensure sustainable economic growth and stable prices; however it alone can not guarantee that the objectives will be fulfilled. All these positive developments have taken place in the presence of a well contained fiscal expansion, as element of sound fiscal policy and bold structural reforms. Banking system has become an important provider of domestic financing for the government. Commercial banks have played a major role in it, while direct financing from the Bank of Albania was limited to address issues of independence and deficit monetization. Recently Government introduced to market papers of five years maturity. In addition, with the consent of the IMF, government will shortly issue euro denominated government securities. Bank of Albania welcomes such development as a certification of cautious and responsible fiscal policy. At the same time we call for more prudence and proper addressing additional risks. It is undeniable however, that these latest developments have been achieved under the watchful eye of International Monetary Fund. IMF has been an important element of the reforms in Albania. Its presence and the memorandum of understanding signed under the framework of ESAF and current blend of PRGF and EEF Programs, enhanced credibility of our economic reforms and served as external anchors.

His answer was simple but true: “It is not important for me where I like to live – he said – it is important where the opportunities are”. As the gap in living standards closes and Albanians see opportunities flourishing in Albania, they will come back. They will bring important human capital and managerial skills, which they have gained in the countries where they work. Many Albanian emigrants are at this stage of the migration cycle and we see potential benefits from such a process. It is the role of banks to match this human capital with necessary financial capital and provide financial services to develop their entrepreneur skills. This role comes very naturally to Greek commercial banks that operate in Albania, which I take the opportunity to thank for their early confidence in Albania. They are natural partners for these new entrepreneurs who are familiar with the culture, and probably have a long history operating with respective Greek offices. The fact that such ventures could also involve Greek capital in the case of pure joint investments makes one more argument in support of my observation. According to the Bank of Albania surveys, Greek companies are ranked first by the size of capital invested in the Albanian economy, while holding the second place for the number of Foreign Direct Investments. The involvement of these banks in financing such activities will play a positive role in shifting the balance of the loans portfolio from retail and consumer crediting toward production activities in industry and agriculture.
Therefore, it is obvious that structural reforms should be implemented immediately in order to bring real interest rates down. Another point I’d like to mention about achieving lower real interest rates is that this anticipated decline cannot be realized without considering short-term interest rates and the inflation outlook, which are CBRT’s policy instruments. For instance, real interest rates cannot be artificially reduced without observing the current and future trend of the rise in domestic demand. As I have mentioned earlier, economic expectations and the confidence in the authorities and policies, which are implemented within this framework, will contribute the most to the achievements made in macroeconomic stability. In this framework, as the Central Bank has mentioned repeatedly, the future trend of inflation as well as the inflation target is considered while making decisions on short-term interest rates. The Central Bank also uses a wide set of information to analyze this trend. Therefore, if the Central Bank uses a variable other than the future trend of inflation in its decisions concerning interest rates, it may send the wrong signals to economic agents, reduce confidence and, contrary to a targeted decline; this may lead to a rise in real interest rates. Despite the important achievements made in the economy, the main factors that limit the decline in real interests are the high debt stock and unfavorable dynamics of public debt. According to empirical studies, there is a direct relation between the ratio of debt stock to the national income and the realized real interest rate.

In a more general way, it seems useful that supervisors should continue their analysis of the ways in which banks take account of the specific features of certain financial assets whose risk profile may be higher than that of the regulatory asset classes defined in Basel II;  –  We need also to deal better with the issue – crucial for some assets such as housing loans and specialised financing – of the correlation between probabilities of default (PD) and loss given default (LGD). This may be quite  4  BIS Review 11/2008  variable depending on the characteristics of housing loans in different countries. More generally, we need to analyse in greater depth the ways in which banks take into account the guarantees and collateral used and especially the correlation between the risk associated with the hedged instrument and that related to the collateral. This is all the more important given that Basel II increases very substantially the range of collateral eligible for prudential recognition. –  Lastly, it is important to improve the quality of stress tests relating to credit risk – including concentration risk – by including in them possible chain reactions and spillovers on different markets. The way in which the results of these stress tests are factored into risk management and assessment systems as well as, where appropriate, into the level of economic or regulatory capital required must also be closely examined, both by banks and the supervisory authorities.
One approach that I find promising was recently outlined in a presentation by Michael Woodford. 11 He described a version of a new Keynesian model with two possible states for credit spreads: normal and elevated (that is during a crisis). He argued that it is the degree of leverage in the financial system, rather than the level of asset prices, that poses a risk to financial stability. In a standard New Keynesian model, the optimal policy commitment will be to hold the output-gap-adjusted price level (the “optimal target criterion”) constant. However, Woodford showed that when the likelihood of a crisis increases when leverage increases, the optimal target criterion is altered to include a factor relating to the marginal increase in the expected loss from a crisis per unit increase in the level of leverage. Therefore, the central bank should balance its inflation and output stabilisation objectives against its concern about financial instability. An attractive feature of this model is that it shows that, in most cases, the central bank will set the optimal policy rate in the usual manner (that is, it can disregard the factor relating to the marginal risk of a crisis in the optimal target criterion) but, if required, the central bank can affect the probability of a crisis by keeping the policy rate higher. An alternative approach is to describe the connection between the Taylor rule for monetary policy and a form of Taylor rule that describes how regulations vary based on an assessment of, for example, credit growth.

Given the effects of monetary policy normally assumed, the difference in inflation and employment would have been marginal. For monetary policy to bring inflation much closer to the target level, a radically different policy would have been necessary. For instance, the Riksbank would probably have needed to cut the repo rate quickly and substantially a couple of years ago rather than making the gradual cuts that were implemented. It would have been difficult to justify this type of monetary policy given the view of economic prospects at that time. It is also clear that the monetary policy that was conducted has had a strong expansionary effect on the economy. For instance, GDP growth has been high. The expansionary monetary policy has also been evident in the rapid credit expansion in the household sector and the price increases in the housing market. It is doubtful whether it would have been wise to reinforce this development with even more expansionary monetary policy. Unfortunately, the strong growth has not resulted in a corresponding recovery in employment. On the contrary, the labour market has developed more weakly than might have been expected from a historical perspective, given the high GDP growth. To some extent this reflects the unexpectedly high  BIS Review 12/2006  5  productivity growth. However, a reasonable explanation is that there are also problems in the labour market that are not cyclical. This is something that should be resolved by other means than monetary policy.
As I have already implied, it was not possible to draw any more precise conclusions on an exact figure, but their conclusion was that an inflation target of between 1 and 3 per cent is a good choice. If it is lower than 1 per cent, it can have a negative effect on economic growth. However, if it is above 3 per cent, it is too high for most people to perceive prices as being stable. This is why countries with an inflation target have often chosen a measure of inflation of around 2 per cent, which was of course also the case in Sweden. Must the inflation target be defined in terms of the CPI? One question that often arises in the debate on monetary policy is whether it might not be better to replace the target for the CPI with a target for some other measure of inflation. One suggestion that came up during the autumn, for instance, when energy and food prices rose  2  BIS Review 2/2008  substantially, was that the inflation target should only apply to domestic inflation – that is increases in prices of goods and services produced in Sweden. Energy prices and many food prices are determined on the world market in any case and are outside the reach of the Riksbank. This is true, but the price of, say, rice in our shops is not the same as the world market price of rice.

At the same time, we of course cannot allow inflation to drift too far from the 2 per cent target, or to wait too long before bringing inflation back on target, as there would then be a risk that the inflation target would lose credibility. So, from the Riksbank’s point of view we have said that monetary policy is normally aimed at attaining the inflation target a couple of years ahead. This is our aim when forecasting the repo rate path. So an appropriate repo rate forecast is normally that inflation is close to the target a couple of years ahead, according to our forecast, without any major fluctuations in the real economy. Monetary policy depends on the type of shock This means that it is not possible to describe our strategy by any mechanical policy rule. To determine whether, and if so, how the repo rate needs to be changed now and in the coming period, it is necessary to analyse the causes behind the deviation of inflation from the target and also how the interest rate, inflation and the real economy interact. What is the driving force in the economy? What type of shock has led to inflation deviating from the target? How has it affected production, employment and so on? And how are they likely to develop in the future? As there is a time lag before the effects of monetary policy become apparent, the forecasts are of central importance.