lowering interest rates and funding costs in a situation where the key rate is close to zero. central banks themselves emphasise that the positive effects of balance sheet policy are uncertain – and the effects must be weighed against possible problems. 6 there are four factors that can be highlighted here : first, it may be difficult for central banks to exit the markets once they have built up large bond holdings, and this would require considerable portfolio adjustments for households, firms and banks. postponing a reversal of the measures could generate expectations that interest rates will remain very low for too long a period after the economy has recovered. this could in turn generate expectations of high inflation further ahead. indeed, the connection between inflation and the money supply constitutes the second challenge. when a central bank purchases securities or provides longer - term loans to banks, the monetary base, i. e. banks ’ deposits at the central bank, increases. there is no direct relationship between the monetary base and inflation. the risk of inflation can only arise if growth in the monetary base coincides with an increase in the broader monetary aggregates through higher customer deposits in banks. for the broader monetary aggregates to see for example speech by federal reserve chairman ben bernanke : “ monetary policy since the onset of the crisis ”, the federal reserve bank of kansas city economic symposium, jackson hole, wyoming, 31 august 2012. see also speech by spencer dale, chief economist at the bank of england : “ limits of monetary policy ”, http : / / www. bankofengland. co. uk / publications / pages / speeches / 2012 / 597. aspx bis central bankers ’ speeches increase, banks must increase lending or purchase securities from enterprises outside the banking sector. since the crisis in 2008, the monetary base in europe and the us has grown considerably more rapidly than the broader monetary aggregates. the risk of high inflation in such a situation should be viewed in the context of central bank exit strategies. in the future, central banks will want to reverse the extraordinary measures that have resulted in substantial growth in the monetary base. this will normally be done when the crisis is over and the economy is recovering. third, the large sums of money involved may also affect exchange rates. even if central banks do not intervene in exchange markets directly, the measures may in the short term reduce the value of the currency issued by a central bank. this will, in isolation, strengthen exchange rates in countries that were initially less severely hit by the crisis. small,

discussion ”, snorre evjen and thea b. kloster, norges bank staff memo 11 / 2012. bis central bankers ’ speeches chart : household debt burden and interest burden in norway, house prices and household debt have reached historically high levels. the rapid growth in incomes has been a primary driving force. the high household debt burden in norway represents a risk of financial instability in the longer term. households can be a source of both direct and indirect losses for banks. banks ’ loan losses will depend on households ’ capacity to pay interest and principal, and to the value of the underlying collateral, which is primarily in the form of dwellings in norway. banks are also exposed to the economic repercussion effects that may occur in the event of a fall in household consumption. in the short run, the risk of disturbances is probably small because interest rates are low and the vast majority of households have job and income security. chart : household financial wealth by debt burden household saving has been high in recent years, but households with the highest debt have the lowest financial wealth. in 2009, only about ten percent of financial assets were held by households with a high debt burden – that is to say those with debt that was more than five times their disposable income. these households also accounted for around one third of total household debt. chart : high population growth and low residential construction rate in recent years, pressures in the housing market have been amplified by high population growth. despite rising housing construction, the number of housing completions remains low in relation to population growth. the housing deficit has grown over several years and is pushing up house prices. the housing shortage requires measures in the real economy – in this case, an increase in housing construction. monetary policy cannot aim to redress such real economic imbalances. low interest rates over time can increase the risk of driving up debt levels and asset prices, bringing them to a level that is unsustainable over time. this is an important lesson from the financial crisis. we take account of this when setting the key policy rate, as has been made clear in the most recent formulation of the loss function. at the same time, there is – with one instrument available to us – the key policy rate – a limit to how many tasks can be assigned to monetary policy. in order to counter financial imbalances, instruments in addition to those available to monetary policy must come into play. macroprudential regulation of the financial industry will