Øystein Olsen: Monetary policy and financial stability considerations Speech by Mr Øystein Olsen, Governor of Norges Bank (Central Bank of Norway), at the European Banking & Financial Forum, Prague, 27 March 2012. *  *  *  The text below may differ from the actual presentation. This speech does not contain assessments of the current economic situation or interest rate setting. Introduction The past few years have clearly shown the costs of financial instability. The near collapse of the financial system in autumn 2008 led to the most severe economic downturn of our time. There was a dramatic decline in international trade, and total world output fell from one year to the next for the first time in generations. When financial markets failed, the authorities had to intervene. Bailout packages for banks shifted debt from private to public hands. Governments increased spending in order to curb the fall in activity. Many countries are now trying to rein in large deficits and rising government debt under difficult conditions. Pension rules and tax systems are under review. The costs of such structural reforms would have been lower in good times. A financial crisis has to be met with appropriate measures, but the main objective in our work on financial stability must be to reduce the risk of crises emerging. History tells us that a financial crisis typically arises when debt has accumulated over a long period. An important task is therefore to contain the buildup of imbalances and secure a robust financial system.
As a result, the Swiss economy has benefited from far more favourable monetary conditions than Germany, for example, which is subject to the same interest rate regime as those euro area countries in the process of convergence. Furthermore, the interest rate bonus has remained, partly because of the heterogeneous economic development of the euro area. Even if the international significance of the Swiss franc diminished, its unique character should strengthen in view of the increasing complexity and diversity of the euro area. The markets have correctly assessed this process. The development of the euro area also presents a challenge to the Swiss economy. In this context, Switzerland's monetary autonomy will remain a significant asset. BIS Review 16/2005  1