It is thus uncertain how the total effect will be if one tries to reduce the growth of the imbalances via monetary policy. A higher interest rate than would be motivated if the risk of imbalances were not weighed in, dampens not only credit expansion and asset prices but also real demand and inflation in the short term. It is necessary to find a balance between these, even if it is based on an uncertain foundation. With regard to reducing growth in a bubble on the stock market, it may not be possible for an individual central bank in a small country to do very much, as the stock market is so internationalised. However, higher interest rates nevertheless lead to less inflated balance sheets when loans become more expensive. This may alleviate the real effects of the corrections following from a stock market bubble. With regard to subduing exaggerated price increases in the housing market, monetary policy should have a greater impact as the housing market is more local and as loans play such a major role in house price developments. History shows that mistakes have been made when one has disregarded the information provided by growth in credit and the money supply.
What we have seen is that there is a pressure on banks‘ unit margins, but that’s been compensated by volume effects – as there is more activity in the banking sector thanks to the support of monetary policy to the recovery. Nominal GDP has been better and NPLs have started to go down, and as a result banks have been able to reduce provisions. Globally you would see that the net effect of those measures so far has been positive on bank profitability. BIS central bankers’ speeches  3  Inflation has repeatedly undershot your forecasts… It is key for a central bank to keep inflation expectations anchored, especially in a period of slack in the economy. And we have some signals that these inflation expectations are still fragile. Is that still the case? I think it’s still the case. Long-term inflation expectations remain fragile. I never said they are de-anchored, I don’t think they are, but there are risks and this is why we are considering further action. A possible de-anchoring of inflation expectations together with a lot of slack is a dangerous cocktail. A lot of the latest wave of commodity price declines is demand related. At some point in the recent past you had a supply side issue, which is a windfall for consumers, but now a significant part is also coming from weak global conditions. Global growth this year will be the weakest since 2009. 4  BIS central bankers’ speeches