During the financial crisis, this spread rose and fell with changes in investors’ perception of bank credit risk. In contrast, its recent moves are related to money market fund reform: term rates rose considerably as prime money market funds both shrunk in size and reduced their maturities to remain highly liquid, and have recently come back a bit as the market has stabilized and markets have adapted to the new industry structure. Shown in (Figure 15) are customer-to-dealer versus dealer-to-dealer Treasury repo rates. The customer-to-dealer market consists primarily of cash investors like money market funds lending to dealers, while the dealer-to-dealer market reflects dealers lending amongst themselves.31 The 8 / 13  BIS central bankers' speeches  spread between these two rates is thus a proxy for the cost dealers with ready access to cashinvestor financing charge to act as intermediaries between these two markets. Since all the lending is secured by Treasuries, this intermediation entails very modest risk. U.S. versus currency-hedged 3-month interest rates, as reflected by foreign exchange basis swaps, are shown in (Figure 16). U.S. and foreign money markets are linked together by a dealer-intermediated foreign exchange derivatives market, which allows firms to essentially convert money market loans and borrowings from one currency into another. A dealer that intermediates this spread can be thought of conceptually as making a secured loan, in which it lends out dollars and takes in foreign currency cash as collateral.
The current account surplus is projected at 2% of GDP by the end of the forecast horizon and could easily be eroded by a surge in demand and/or lower export revenues. 2  Chart 1  As Chart 2 shows, both private consumption growth and rising house prices are due mainly to increased real incomes and households’ improved financial position. This differs greatly from the situation in pre-crisis Iceland, where increased household leverage played a leading role, but as can be seen in the chart on the right, lending to households has not increased in real terms since 2012. Chart 2  The fact that inflation has been low in recent years despite steep rises in wages and house prices stems primarily from two things: on the one hand, positive supply shocks in the form of strong export growth and improved terms of trade, which have pushed the exchange rate of the króna upwards, and on the other hand, price deflation in international goods trade. Import prices have therefore fallen steeply in krónur terms, as can be seen at the left in Chart 3. What would happen when this imported deflation turned around was always a source of concern. Such a development now appears to be on the horizon, as can be seen in the chart. But fortunately, the rise in unit labour costs seems to be losing pace, as can be seen in the chart at the centre, and house prices appear to have 3  peaked.