Rather than slowing lending, Norwegian banks have reduced their risk-weighted assets through lower risk weights and changes in the composition of their lending portfolios. Lending has increased more in the residential mortgage market, which features lower risk weights than in the corporate lending market. Norwegian banks’ adjustment strategies remind us that macroprudential policy can influence economic activity through various channels, and thus have an effect on price stability, the main objective of monetary policy. Macroprudential policy could also have an impact on the transmission mechanism of monetary policy. For instance, if new regulations reduce households’ ability to borrow against home equity, the credit channel of monetary policy is likely to become weaker. Monetary policy, for its part, can be one of several factors contributing to a build-up of financial imbalances. We have learned again that long periods of low interest rates can increase the risk that debt and asset prices will reach unsustainable levels. And, as we have witnessed, low interest rates tend to prompt financial market participants to intensify their search for yields from high-risk assets. Hence, even though the objectives and the instruments are different, monetary policy and macroprudential policy cannot be viewed as separate. Indeed, monetary and macroprudential policy instruments can work in the same direction. If the economy is booming, with rising inflation prospects and the risk of a build-up of financial imbalances, a simultaneous tightening of both monetary policy and a macroprudential tool – the countercyclical capital buffer – can underpin the objectives of both policies.

Last summer, sparked by the debate about a possible reduction in the US Federal Reserve’s bond purchase programme, long-term interest rates rose across the globe. Switzerland was no exception. The most recent interest rate reduction by the European Central Bank (ECB), by contrast, had little effect on Switzerland. One possible reason for this is that money market rates in the euro area were already at a very low level before the ECB’s decision and did not fall any further. Since October 2011, inflation rates in Switzerland have been predominantly negative. The introduction of the minimum exchange rate in September 2011 prevented a more severe deflationary trend, however. Lower price levels in Switzerland reflect, on the one hand, the impact of the past appreciation of the Swiss franc on import goods prices. On the other hand, price developments show clearly that domestic companies are lowering their costs so as to improve their price competitiveness. More than two years after the introduction of the  2  BIS central bankers’ speeches  minimum exchange rate, both effects have weakened considerably; this is also reflected in the current path of inflation. At the same time, inflation abroad is receding, especially in the euro area. The inflation differential between Switzerland and the euro area has thus decreased significantly. Inflation differentials play an important role in the valuation of the Swiss franc. This decreased inflation differential means that the real effective exchange rate will hardly change from now on and will remain considerably above its long-term average.