However, this provision does not prohibit Norges Bank from purchasing government bonds in the secondary market. Nevertheless, there is much to suggest that the purchase of government bonds is not an option as a policy instrument for Norges Bank. There a number of reasons for this. As I mentioned previously, floating-rate loans dominate the Norwegian credit market. Unlike other countries, the level of long-term interest rates in itself has little effect on credit demand in Norway. If government bond purchases do not affect future short-term interest rate expectations either, the effect on Norway’s wider economy will be limited. Studies in other countries do not provide an unequivocal answer as to whether the bond purchases have had the strongest impact through a fall in the expected policy rate or through lower term premiums on long-term 4/9  BIS central bankers' speeches  government bonds. We have seen in earlier periods that fluctuations in Norwegian government bond yields do not necessarily influence other interest rates. There were signs of strong demand for Norwegian government bonds during the euro crisis between 2011 and 2012. Government bond yields fell fairly sharply in this period, primarily as a result of lower term premiums, but did not feed through to any great extent to the interest rates that are important for banks’ funding costs. Chart: Yields on government bonds, swaps and covered bonds Other countries’ government bond yields play an important role as a reference for other interest rates, which is not the case for Norway.
12  9 8 7 6 5 4 3 2 1 0  EES December 2009 December 2009 Report March 2010 Report (*)  (*) Estimated using average financial asset prices over the last 2 weeks up to 29 March 2010. Source: Central Bank of Chile. BIS Review 61/2010  13