On top of that, the marginal/average adjustment for rentals to which I referred earlier would have tended to raise the realised real rate even further, because the prices influencing business decisions probably fell by more than the CPI. In sum, what started as a headline real rate of 3.3% ended up as a rate well in excess of 10½%. Businesses would have been affected by the factors responsible for the difference between these figures, but would not have been able to anticipate all of them. If we move on to April this year, the position is rather different. The backward-looking real rate, which tends to be the one which most people take as their guide when clamouring about oppressive monetary policy, is indeed high at 8.9% - again taking 12-month HIBOR as the base. But because expectations are that prices are now going to move up rather than down, the forward-looking measure, based on consensus forecasts (from the private sector) of what the published CPI will show, yields much less, 5.6%. In addition, the marginal/average adjustment may now have turned the corner, since business decision-takers may be facing prices that will rise by more than the recorded CPI, in which case real interest rates will now be perceived as lower than 5.6%. Perceptions may still be of a figure which is above the 3-4% range, which is often regarded as a global norm; but perceptions vary, and there may be some who visualise a lower figure.
Companies were cautiously optimistic in the first half of the year, but summer saw a postponement of investment and recruitment decisions. Confidence loss slowed economic growth, easing inflationary pressures. In November and December, we thus lowered the interest rates to an all-time low. 3. Under normal circumstances, changing interest rates alone would have sufficed to influence prices and economic activity. Unfortunately, the crisis proved extensive  BIS central bankers’ speeches  1  enough to disrupt the functioning of the monetary policy transmission mechanism. The ability of commercial banks to issue loans to companies and households was thus significantly reduced. This compelled us to take various non-standard measures, starting from August. We supported the securities market in order to prevent paralysation of the activities of banks; we continued the unlimited provision of liquidity loans to banks; we offered banks three-year loans on highly favourable conditions; we expanded the list of eligible collaterals for liquidity loans, and lowered the minimum reserve requirement from 2% to 1% at the end of the year. 4. Looking back, it has to be admitted that the annual growth in consumer prices was faster than expected, amounting to 2.7%. Inflation picked up mostly due to the price growth of commodities. This is confirmed by core inflation remaining below 1.5%. Inflation expectations are also in line with our long-term goal. [THE PRICE OF CRISIS-TIME MONETARY POLICY FOR CENTRAL BANKS] 1. These bold and crucial steps came with a price – the risks inherent in the central banks’ balance sheets have increased.