1  The circumstances in which financial markets can affect the real economy were covered in my speech: ‘Market finance and financial stability: will the stretch cause a strain?’ (February 2018). 3  All speeches are available online at www.bankofengland.co.uk/speeches  3  So as we consider the bear of stretched valuations in credit markets and the bergs of leverage and liquidity that could affect the resilience of those markets, I’ll look at whether each is an issue just for market risks or also of relevance to the wider economy too. Let’s begin with the moonwalking bear in debt markets. Consider this:  The yield on a basket of dollar-denominated corporate bonds is now closer to the expected average short-term risk-free rate over the life of those bonds than at any time in the past twenty years (see slide 3). The premium investors earn for taking interest rate and credit risk is squeezed. On the face of it that suggests an unusual degree of investor confidence about the interest rate outlook and corporate prospects generally.2 This compression of the premium has meant that – unusually – dollar corporate bond yields haven’t risen, even as the US risk-free rate has. (slide 4)  Perhaps companies, globally, have become less risky? That seems to be the view in the market for credit default swaps at least. Two years ago, the average annual premium of insuring against investment-grade corporate default was 85bp of the amount insured. Today, it is 50bp.
Over time, the size of the internationally exposed sector will be affected by the portion of petroleum revenues that is absorbed by the Norwegian economy but will be unaffected by monetary policy. Any  2  BIS Review 8/2002  appreciation of the krone may, nevertheless, affect the speed at which changes occur in the business sector. To maintain a balance in the Norwegian economy, the phasing in of petroleum revenues must be countered by a monetary policy stance that is tighter than it would otherwise have been. This may be accomplished through a higher interest rate, an appreciation of the krone, or both. On balance, we expect moderate growth in the mainland economy in the next two years. The projections for GDP growth that were presented in the October 2001 Inflation Report were approximately on a par with the growth potential of the economy. Household consumption and public spending are the main forces underpinning growth. Fixed investment and exports are restraining growth. Brisk growth in consumption is resulting in high demand for labour in public and private services. Low international growth and lower petroleum investment are curbing employment growth. A tight labour market is generating continued high growth in labour costs. An expansionary fiscal policy, growth in private consumption and a continued high rise in labour costs contribute to a high rise in prices for domestically produced goods and services. At the same time, we expect a temporary decline in prices for imported consumer goods.