christian noyer : the role of inflation - indexed bonds in the process of setting monetary policy : a central banker ’ s perspective speech by mr christian noyer, governor of the bank of france, at the morgan stanley seminar on indexed bonds, paris, 9 june 2004. * * * ladies and gentlemen, [ dear friends ], it is a great pleasure for me to address you here in the context of the first “ seminaire de paris ” on inflation - linked securities organised by morgan stanley. today, i will focus more specifically on “ the role of inflation - indexed bonds in the process of setting monetary policy ” from a central banker ’ s perspective, based on my own experience as the former vice - president of the ecb and the current governor of the banque de france. throughout my presentation, i will occasionally refer to the monetary policy strategy framework implemented by the eurosystem in which asset prices, in particular inflation - indexed government bonds, can play a role in the context of our economic analysis. having said this, i will neither elaborate further on the ecb ’ s framework nor comment on the last governing council ’ s monetary policy decision. price indexation of financial contracts is not a new phenomenon. according to robert shiller1, the world ’ s first known inflation - indexed bonds were issued by the commonwealth of massachusetts in 1780 during the revolutionary war. these bonds, the so - called “ depreciation notes ”, were issued to us soldiers as deferred compensation for their services. they were mainly designed to deal with severe wartime inflation. although the bonds were successful, the concept of indexed bonds was set aside until the 20th century. finland introduced indexed bonds in 1945, sweden in 1952, iceland and israel in 1955. since then, indexed bonds have usually appeared in countries experiencing very high rates of inflation, such as brazil in 19642, chile ( 1966 ), colombia ( 1967 ), argentina ( 1972 ) or even the uk in 1975, with the issuance of so - called “ granny bonds ”, i. e. non - marketable indexed - linked savings retirement certificates. later on, in 1981, the uk issued a marketable instrument - the index - linked giltin a context of rapidly increasing prices. in all of these cases, the issuance of inflation - indexed debt instruments by the government was aimed at developing long - term capital markets and improving the credibility of anti - inflationary policies. as regards this last point, such a rationale is, however

##s. our monetary policy must now be guided by confidence and patience : confidence that we are making steady progress in bringing inflation down towards 2 % by 2025 ; and patience that interest rates will remain stable at their current level for the time still needed to pass them on in full. page 2 of 12 1. 1 enhanced profitability and solvency there can be no doubt that european banks are generally benefiting from higher key interest rates, although there is a certain time lag for french banks due to their business model. the predominantly fixed interest rates on their assets ( 97 % of outstanding housing loans are granted at fixed rates ), and on regulated savings on the liabilities side, mean that financial conditions take longer to adapt in france. an automatic catch - up is expected over the next few quarters, as french banks continue to renew their assets and liabilities. this time lag has been attenuated by the decision to stabilise the interest rate on livret a passbook accounts, which was kept at 3 % on 1 august and should remain stable at this level until at least 1 february 2025. this is a very favourable decision for bank interest rate margins ; the counterparty, i should recall, is the accelerated growth in popular savings passbook accounts ( leps ), which were held by as many as 10. 3 million savers in september 2023, a number which should climb to over 12. 5 million next summer. this stabilisation of interest rates on the livret a passbook account is also intended to ensure the sound financing for the french economy – i'll come back to this point later. the financial results of the french banking sector have remained very robust : the 2023 half - year on half - year pre - tax earnings of the six largest banking groups grew by 2. 5 % to stand at eur 21. 7 billion and net banking income ( nbi ) has been trending upwards since early 2022. consequently, french banks'solvency ratio has improved once again, rising to 15. 6 % at 30 june 2023, compared with 15. 1 % at the end of 2022, well above minimum regulatory requirements. the results published by the four main french banking groups in the third quarter of 2023 ii point to a more mixed performance, with french retail banking revenues sometimes impaired by interest rate hedging strategies that can prove costly in the current interest rate environment. iii page 3 of 12 the rise in interest rates is also