A decision on whether to use the interest rate to deal with the threat of financial instability is always likely to be difficult – particularly in a small open economy, where raising the interest rate is likely to produce an unwanted exchange rate appreciation. So a critical question must be whether effective macroprudential policies are to be found in the country in question.
Currently, yields on investmentgrade corporate debt generally are at the low end of levels of the past several decades, despite having risen on balance by about ¾ to one percentage point since late spring of last year. For speculativegrade firms, yields have fallen almost one percentage point as spreads contracted sharply.