Fundamentals that we are not able to disregard include the fact that housing construction is low and has been so for a number of years. A low level of construction, combined with a growing population and a move to metropolitan areas also contribute to a rise in housing prices, and ultimately to an increase in debt. And the conversion of rental properties to tenant-owned properties also contributes to increased debt. A further aspect is that household savings are high and have increased at the same time as debt has increased. But high indebtedness probably means that the economy will be more sensitive to shocks, even if it can be explained by fundamentals. An economic downturn could then be reinforced by households with large debts trying to increase their saving by reducing their consumption. Moreover, we can hardly rule out the possibility that households’ increased indebtedness in recent years has at least partly been caused by unrealistically low expectations of future mortgage rates. In my opinion, it is therefore in principle justified for monetary policy to now take into account the rapid increase in household indebtedness. Risks with a low repo rate A further question is thus in what way monetary policy can lead to financial imbalances building up. International academic research discusses several potential problems that can arise if a central bank holds its policy rate at a low level for a long period of time.
4  BIS central bankers’ speeches  From principle to practice The question is then how the principle of consideration of financial risks and imbalances should be put into practice in monetary policy. How should the balance between the different tasks be managed? When determining this we must consider whether other tools than monetary policy are more suitable for managing financial risks, whether our concerns regarding household debt are justified and what effects monetary policy has on the imbalances and risks that concern us. I do not intend to conduct any deep discussion of the links between monetary policy and other tools today. As expressed by the Riksbank (2010), I note that it is not primarily monetary policy, but an efficient regulatory framework and supervision that is important to prevent financial imbalances. The way in which monetary policy should take into account financial risks may therefore depend on the formulation of the regulatory framework and the supervision. I shall return to this question when I discuss the new framework for macroprudential policy. Household indebtedness is worryingly high Also, I do not wish to get into a detailed discussion now as to whether the concern over rising house prices and household debt in recent decades is justified.5 It is clear to me that we do not fully understand what the underlying factors are. We therefore do not know whether the upturn is largely explained by fundamental factors or whether it reflects imbalances that have built up in the economy.