is first and foremost the case that these loans will become more expensive if the interest rate is generally rising. the market perception is that interest rates have bottomed out. only time can tell whether this is true, and nobody can say anything definite about the level of interest rates in five or ten years ’ time. however, if the international upswing really gets under way, inflation prospects can be affected, making interest - rate increases like those already seen in sweden necessary. if the european central bank sees this development as a threat to price stability and raises interest rates, denmark will follow suit. as a result, adjustable - rate loans in both euro and krone will become more expensive. what is the explanation for the growing popularity of loans at variable rather than fixed interest rates at the end of the 1990s? why did this take place at a time when the level of interest rates was historically low? in retrospect, one can see that borrowers should have taken loans at variable rates when interest rates were very high, e. g. in the early 1980s. at that time mortgages were financed predominantly with fixed - rate loans because the economic situation was perceived as far more uncertain. inflation was high and fluctuating, and interest rates had risen significantly. in an uncertain economic world borrowers ’ primary need was to be certain of the level of their future mortgage costs. if the first few years were manageable, experience showed that there was no reason to be concerned for the long term. the situation today is entirely different. the economy has been stable since the end of the 1980s and there is a general faith that reasonably low inflation and equivalently low interest rates will dominate for years to come. many borrowers therefore now opt to benefit from the fact that the short - term interest rate is normally lower than the long - term rate. the risk of rising interest rates must be assessed on a par with the risk of other events that can affect private finances. foreign exchange has flowed into denmark during the last 15 months. this inflow is partly due to the current - account surplus of kr. 34 billion in 2001. the foreign - exchange reserve rose by almost as much, implying that other capital flows were close to zero in net terms in that year. cross - border trading of bonds and shares, corporate acquisitions and other direct investments lead to major capital movements and thereby to the demand for and supply of foreign exchange. in some periods the demand for foreign exchange will exceed supply – and in other periods the

bodil nyboe andersen : recent economic developments in denmark speech by mrs bodil nyboe andersen, governor of the national bank of denmark, at the annual meeting of the association of danish mortgage banks, copenhagen, 11 april 2002. * * * in its annual accounts for the year 1886 - 87 danmarks nationalbank for the first time presented not only financial data, but also a brief report on the past year. the report commenced as follows : “ danmarks nationalbank ’ s activities during the past banking year have been affected to a significant degree by the prevailing slackness of business in important areas of commerce. throughout the banking year money has been in ample supply both at home and abroad, and the interest rate extremely low. in denmark, both the discount rate for bills of exchange and the lending rate were lower than in any previous year, and the demand for money was in both cases unusually low. ” this was all that danmarks nationalbank wrote about the economy ’ s development in this first report. however, a noteworthy statement in this paragraph is that “ the demand for money... ( is ) unusually low ”. in the terminology of our day this means that there was no demand for credit, and it was no consolation that “ the lending rate... ( was ) lower than in any previous year ”. this could be construed to mean that danmarks nationalbank wanted to say that nothing more could be achieved by relaxing monetary policy. this discussion has appeared time and time again in the history of monetary policy. best known is keynes ’ demonstration of situations where the liquidity trap prevents any stimulation by means of monetary policy. his response was that fiscal policy had to be used instead. in our day we see this monetary - policy dilemma in the case of japan, but here fiscal policy apparently has no effect either. on the other hand, the usa has used both monetary and fiscal policy to stimulate economic activity in recent years, apparently with success. the federal reserve has a rather broad objective for its monetary policy, and interest - rate decisions are based on arguments related to an overall assessment of the cyclical position. this has led to a very expansionary monetary policy in the usa in 2001. however, the usa ’ s experience cannot be applied directly to europe, since the usa ’ s economic structure is radically different, e. g. its labour market. during the last 10 - 15 years europe ’ s division of work between monetary and fiscal policy has become