samchain/econo-pairs-v1 huggingface dataset:
Irma Rosenberg: Monetary policy and the Riksbank’s communication Speech by Ms Irma Rosenberg, First Deputy Governor of the Sveriges Riksbank, at Swedbank, Stockholm, 8 October 2007. *  *  *  Introduction In recent decades there has been a clear trend for central banks to strive for greater openness in their monetary policy. Central banks are now publishing an increasing amount of background material in the form of analyses and forecasts for inflation and other economic developments. The number of countries introducing explicit inflation targets is also growing. Something that is being discussed to an increasing extent, but which not so many central banks have dared to carry out yet, is the publication of the central bank’s own forecast for its policy rate 1 . At the beginning of this year the Riksbank decided to take this step. The purpose was to become even more open and clear regarding the way we conduct our monetary policy. I will begin today by discussing this new system and how it affects our communication. I will also give some reflections on the experiences of the two occasions on which we have published our own interest rate path in connection with the Monetary Policy Reports published in February and June this year. I will then conclude with a few words on the most recent monetary policy meeting in September. The Riksbank’s communication with an own interest rate path Advantages of an own interest rate path What are the advantages of publishing our own forecast for the repo rate?

I hope that over the course of this two-and-a-half days' conference, the deliberations, emerging from the experts and audience on a wide array of supervision-related issues, will shed more light on how best to deal with weak banks and systemic crisis. All banking supervisors and central bankers seek the “Holy Grail” aspiration for a stable financial system which is resilient and capable of returning to a balance after a shock. To fulfill this common goal, let me repeat a golden principle of sound banking supervision - prevention is fundamental to avoiding a banking crisis. We all know that handling a crisis is always very difficult and painful; therefore, supervisors and bankers have a shared responsibility and accountability to prevent banking problems. Supervisors must create a sound framework, foster a robust and effective system, and establish clear procedures to identify and deal with weak banks. This means the supervisors must be equipped with the legal power to effectively carry out their duties and have the necessary tools, resources and capacity to solve the problems. These are the necessary infrastructure or building blocks of a sound and stable financial system. Equally important, the Board and management of individual banks must shoulder the responsibility of monitoring and addressing bank weaknesses. They cannot fail in their oversight and risk managerial duties, just as supervisors cannot fail in their on-site and off-site supervision. In this respect, I am a strong believer that good governance is the corner stone of a stable financial sector.
Also, an increasing number of banks are recognizing climate change risk in response to investor and other stakeholder initiatives. Judging from this evidence, while the response of financial institutions is positive, it is still very much in an early stage. And in the case of Asia, the progress is even more limited. The main supplier of carbon credits in CDM is China, while the rest of Asia lags behind. In Asia, the engagement of financial institutions on climate change is scattered and not yet a momentum. The progress is hampered partly by inadequate supporting framework that includes lack of clear policy and incentive as well as information. Let me now discuss some of the current problems in Asia and the prospects for the financial system in emerging markets, especially in Asia, to become more engaged with the issue. Given limited progress so far, the challenge is how to engage the financial system in emerging markets more extensively on climate change. In moving this issue forward, a critical role has to be played by policy, especially on the role of incentive and the development of tools that can facilitate the response to climate change. On incentive, a good starting point is to discuss the principles that would be important in guiding the design of policy, which in my view, four key principles stand out. First, the role of the states and policy are critical to ensure that the global rule of the market is clear and continuous beyond 2012.

Bandid Nijathaworn: Is climate change a big deal for the financial system? Speech by Dr Bandid Nijathaworn, Deputy Governor of the Bank of Thailand, at Bank Indonesia’s Annual International Seminar on “Macroeconomic Impact of Climate Change: Opportunities and Challenges”, Bali, 2 August 2008. *  *  *  Thank you Chairman, First, let me thank Bank Indonesia for the kind invitation. When I was asked whether I could speak on climate change and the financial system, I felt the suggestion was a challenging one, especially at this time when we need to build some momentum on this important issue. My topic today is “Is climate change a big deal for the financial system?”. Given the limitations of time, I want to focus my discussion on just two issues. The first, is why climate change is a big deal for the financial system, and the second, is to offer some thoughts on how to engage the financial system going forward on climate change, especially in the context of emerging market economies in Asia. Much of what I will say is still very much a preliminary thought, which is still evolving. Is climate change a big deal for the financial system? The answer is definitely yes, and there are a number of good reasons why this is so. First, although uncertain, the macroeconomic impact of climate change is thought to be large, which is likely to pose risk to the financial sector, as well as to financial stability.
The red line simulates an increase in inflation from 2% to 5%, three times the rise in the blue line. The peak effect on the debt:GDP ratio is 12%, quite a bit less than three times the effect of a 1%-point rise. 13  Using the same terminology but allowing for a surprise and persistent increase in inflation, from π to π + Δπ, the rate of change of the debt:GDP ratio becomes ܾሶ ൌ ݀ െ ሺ݃ െ ‫ݎ‬ሻܾ െ ߂ߨܾ଴ ݁ ିሺఈା௚ାగା௱గሻ௧ . The last term is the impact of the surprise inflation. That impact decays with the ratio of old debt to nominal GDP (so at a rate α plus nominal growth). We assume that the debt ratio was stable to begin with. This requires g>r and d = (g-r)b0, implying ܾሶ ൌ ሺ݃ െ ‫ݎ‬ሻሺܾ଴ െ ܾሻ െ ߂ߨܾ଴ ݁ ିሺఈା௚ାగା௱గሻ௧ . If some fraction µ of the starting level of debt b0 is owned by a QE fund, and backed by interest-paying reserves, the last term is just multiplied by (1-µ). For the graphs we use g=1.5%, r =-1%, π=2% and α=6% (implying it takes 12 years for half the existing stock of debt to mature). The simulations allowing for QE use µ = 0.4. The blue and red lines use Δπ = 1% and 3% points respectively. 13  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  13  That’s not to say inflation can’t or hasn’t in the past had material effects on government debt.

But that is not the end of the matter, as investors need to do something with the proceeds from their asset sales. They could just sit on the proceeds, but it is more likely that in due course they will buy other assets, including those that offer a higher return. So, in the course of time, the whole range of equity and bond prices are driven up, lowering the cost of finance to companies and increasing its availability. Our purchases of corporate assets are intended to have the additional effect of improving the functioning of those markets. By standing ready to buy commercial paper and corporate bonds, we hope to improve their liquidity, lowering the spread above safe assets of equivalent maturity, and with it the cost of finance to business. 2  BIS Review 62/2009  There are signs that these measures are having a beneficial impact too. Spreads on commercial paper eligible for purchase have fallen by around ½ percentage point and the size of the market has increased by around 10%. Similarly, average spreads on sterling investment grade corporate bonds for industrial companies have declined by some 60 basis points and gross issuance of bonds by UK companies has been strong. These developments may reflect a range of influences, but feedback from market participants suggests that our purchases have indeed played a helpful role. In addition to these channels, the banks, finding themselves flush with extra reserves, may choose to lend them on, providing a further kick by boosting the supply of credit.
How the stance of monetary policy evolves will depend on how the economic outlook evolves. This should be self-evident. But it is an assertion that bears repeating today. Not all of the MPC’s decisions last week were unanimous. The published vote pointed to a finely balanced decision over whether to raise Bank Rate by a standard 25bp to 0.5% or to hike by a bigger 50bp step in order to get back to pre-Covid levels of Bank Rate in one bound. That decision was decision was finely balanced for me as an individual voter on the MPC, as well as for the overall balance of votes on the Committee as a whole. The considerations I have outlined in this talk help to explain why I voted with the majority on this occasion. First, I am sceptical of efforts to return Bank Rate quickly to some pre-defined neutral level or terminal rate, given the inevitable conceptual and empirical uncertainty surrounding such a level or rate. As we have seen, such an approach risks increasing inflation and output volatility if policy is mis-calibrated owing to assuming the wrong value of R- or Y-star. Better to adopt a more measured and data-dependent approach, which learns from how the economy responds to each step taken rather than pre-commits to a concept surrounded by uncertainty. This is likely to produce a steadier, more persistent and more purposeful path for policy rates.

These have repeatedly surprised to the upside in both magnitude and persistence over the past year, putting painful pressure on the cost of living and placing the MPC in the current, very uncomfortable position of forecasting headline CPI inflation to peak at over 7% in April. For a net importer of energy and goods, these developments represent a deterioration of the terms of trade.2 This is an adverse real shock, with adverse real consequences. Higher international energy and goods prices unavoidably weigh on UK real national income. But it is a real shock with substantial nominal implications. Higher energy and core goods prices account for the bulk of the inflation target overshoot, and a large part of the successive upside surprises we have seen in inflation outturns. This lays bare that we are in difficult trade-off territory for monetary policy. The driver of higher inflation is also a driver of lower real income and demand in the later years of our forecast, and thus higher unemployment. No ‘divine coincidence’ here.3 Bringing down inflation through monetary tightening has to be weighed against its impact on employment and activity. Looking ahead, the sensitivity of headline inflation to developments in international energy prices is significant, as the alternative forecast scenarios published in the MPC’s February Monetary Policy Report illustrate. 2  All speeches are available online at www.bankofengland.co.uk/news/speeches  2  Were international energy and goods prices to stabilise – even at permanently higher levels – eventually their direct impact on UK inflation would dissipate.
On the other hand, besides an increase in the volume of one-week maturity transactions, longer term transactions are very sporadic. In addition, this low development of the interbank money market is also reflected to the wide spreads of the quotations for trading, published by commercial banks. Nevertheless, the development of the interbank money market is made difficult also because of other reasons, some of which are of objective nature. It can not be developed as an isolated market. It progress is highly correlated to the economic development in general and the development of other financial markets in  BIS Review 122/2007  1  particular. The financial market is still characterized by the domination of the banking system, while its other segments continue to be in a minor state of their development. There are interesting developments in the insurance companies market, while the segment of pension funds is still underdeveloped. Furthermore, other specialized intermediaries are completely missing, including here even the capital market. All the above and other reasons such as the high degree of informality in the economy, credit demand dominated in foreign currency, are factors which directly or indirectly impede the enhancement of money market efficiency. However, rightly comprehending that many of the reasons are of objective nature, we believe that within the limitations imposed by the abovementioned factors, still there are gaps, about which I encourage you, to jointly fill as soon as possible.

In the latest survey conducted by the Bank of Albania on “Money Market Issues”, 7 out of 14 respondents (commercial banks), (which possess 59 per cent of the market share), outlined “the excess structural liquidity” as the main barrier to the development of the interbank money market, while 4 out of 14 banks (which have a market share of 30 per cent) highlighted “the credit risk” as the second most important barrier. The tendency to keep excess structural liquidity as a bank policy was pinpointed by 13 out of the 14 interviewed banks, otherwise meaning that banks that share 92 per cent of the market do have a tendency to keep excess structural liquidity. We notice that the reasons and obstacles brought up by banks are mostly subjective, and their prevention depends more or less depend on their policies and behavior. Banks keep excess liquidity because there is no a developed money market where they could invest this liquidity at all times at a fair market price. This market can not be developed on its own! It is banks’ active liquidity management as opposed to a passive one that creates incentives for developing the markets. In this context, I would highly recommend you to implement stricter internal control policies and procedures, so that they can identify opportunity cost and missed profit opportunities. Such a thing will lead to improved efficiency and competitive positions of the bank on the one hand and market development on the other.
These foundations are the treaty negotiated in Maastricht in 1991 and the Statute of the ESCB. The Treaty and the Statute of the ESCB are clear: the primary objective of the Eurosystem is to ensure price stability. The ECB and the national central banks of the Eurosystem are independent so that they can pursue this goal. Neither the ECB, nor the national central banks, nor the members of their decision-making bodies may seek or receive any instructions from anybody. This applies to European as well as national institutions. They, for their part, are obliged to respect the principle of central bank independence. The priority given to price stability and the independence of the central bank are the results of a long, historical learning process in monetary policy. It is theoretically well founded and empirically proven that independent central banks are better able to ensure low inflation rates than those which are subject to political influence. Independence guarantees above all that central banks can focus on securing price stability over the medium and long term and are not exposed to short-term political influences, or to vested interests’ pressures. In Germany the primary mandate of price stability and the independence of the central bank, as embodied by the Deutsche Bundesbank, have a long tradition. This tradition and the Statute of the Bundesbank – which also inspired other central banks’ statutes in Europe – were one of the major forces behind the Treaty of Maastricht and the Statute of the ESCB.

I would like to come now to my second question: What is the role of the euro amid the current financial market turbulence? The question makes clear that the global environment in which we operate has completely changed in the past 18 months. Global financial market turbulence and the economic downturn We are currently in an extraordinary situation. It is marked by an intensification and broadening of the global financial market turbulence – in particular since September last year – and a sharp downturn in the world economy. The tensions have increasingly spilled over from the financial sector to the real economy. Their negative effects can be felt worldwide. Since the end of 2008 virtually all economies – both of the industrialised countries and the emerging markets – have been moving in the same direction. This considerably contributes to the scale of the present downturn. This economic downturn has also affected the euro area. Foreign demand for exports from the euro area has fallen. Very low confidence and tight financing conditions have adversely affected domestic demand. On the basis of our current analysis, we see persistent weakness in economic activity in the euro area over the coming quarters. The financial market tensions have a further impact on the global and domestic economy. The economic prospects are still marked by an exceptionally high degree of uncertainty. 4  BIS Review 16/2009  Reaction of the ECB and European governments The ECB reacted quickly and flexibly to the financial market turmoil.
As regards negative interest rates, although there is no conclusive evidence to date that they have adversely affected the supply of bank credit, we cannot rule out that maintaining rates at very low levels for an additional, potentially extended, period of time, could ultimately have some negative consequences for the bank-based transmission of monetary policy. In this regard, the mitigating measures adopted by the ECB, consisting of a tiered system for remunerating excess liquidity holdings, are intended to soften the negative impact on bank profitability of the new reduction in reserve remuneration, and thus ensure the expansionary effect on activity and inflation of any additional cuts to interest rates in the current setting. 2. Banking sector profitability This is the economic environment that banks, economic agents and, in particular, financial institutions will face in coming years. If I may, I will now move on to analyse the developments in Spanish banking sector profitability and the determinants thereof. Profitability is one of the main variables that characterise the financial position of banks and it provides the first line of defence against adverse shocks. Indeed, the volume of a bank’s profits determines the return its owners can earn on the capital invested. This, duly adjusted for the risks assumed, will affect the bank’s valuation. Moreover, profit levels determine the margin these agents have available to address shocks. Indeed, low profitability reduces the possibility of generating capital internally through retained earnings.

As a result, since that date deposit rates on new business have fallen by a similar amount as average remuneration of loans. Now,  9/13  however, as the cost of deposits has come very close to zero, it would be more difficult to pass any further decreases in remuneration of assets through to the cost of deposits. It is often argued that banks’ net interest income is being adversely affected not only by the low level of interest rates but also by the flattening of the yield curve observed in recent years. This effect depends, first, on the extent to which there are positive differences between the maturity of the assets and the liabilities of banks. In general, these financial intermediaries receive short-term funding and provide long-term financing; this is known as maturity transformation. However, in order for the flattening of the yield curve to have a negative impact on net interest income, in addition to there being maturity transformation, banks need to be granting fixed-rate loans. If they are lending at variable interest rates, the remuneration will usually be linked to short-term yields, thus contributing to holding the loan-deposit gap steady. In the case of Spain, although banks operate with maturity transformation, the bulk of their long-term lending is variable rate. In consequence, the flattening of the yield curve in recent years should have had less impact on Spanish banks’ net interest income than on the net interest income of banks in other European jurisdictions such as Germany or France where fixed-rate loans predominate.
History has shown that it is socioeconomically efficient that the government authorities have a monopoly on issuing cash, as this then becomes a risk-free asset that can be used both as an arithmetical unit and for saving and for making transactions. Almost all countries now have central banks that issue banknotes and coins. In Sweden, we are now facing a historical milestone with regard to cash. The use of banknotes and coins has declined at a very rapid pace in recent years and the general public are increasingly using digital means of payment instead. However, there still remains a fundamental requirement for a safe instrument that can be used as an arithmetical unit and to make payments and as a store of value. A critical issue, in light of this development, is what the role of the state should be on the payment market. This is an important issue to society that contains many dimensions, including consumer issues, financial stability perspectives, contingency planning and competition aspects. The Riksbank is therefore investigating whether we should issue a digital krona, or e-krona, so that there will continue to be a means of payment issued by the Riksbank. In addition, the position of cash in the economy and the Riksbank's responsibility for the handling of cash need to be investigated further and specified. Responsibility for RIX – the Riksbank's system for largevalue payments The Riksbank can already be said to issue digital money, but this can only be held by banks and some other financial institutions.

For instance, Finansinspektionen could have a stronger obligation to consult the Riksbank on issues that concern liquidity regulation and supervision or the Riksbank could be expected to give recommendations in this field. International cooperation important to promote financial stability Finally, I would like to take up the international perspective, which has gradually increased in significance over the years. As the financial sector becomes increasingly cross border, the international cooperation on financial stability issues, and in particular financial regulations and systemic risk, has strengthened. In general, the central banks' cooperation in this field is very extensive. For instance, most central banks have significant responsibilities in the systemic risk field, not least within the EU. The Riksbank currently participates in around 80 committees and working groups that focus on issues regarding the efficiency and stability of the financial system. This gives us both the possibility to influence questions with a bearing on financial stability, and to learn from how other central banks conduct their analysis of financial stability and how they manage payment system issues, cash and the role of lender of last resort. In some cases the Riksbank takes part in forums that are purely for central banks (such as the BIS and the ECB), and in other contexts we participate alongside other Swedish authorities. In the forums that are solely for central banks, other authorities are not able to replace the Riksbank, even if the Riksbank did not have a mandate in the areas discussed.