However, I personally thought there were a number of factors in the global economy that made the forecast unusually uncertain. Prior to the meeting in July, there had been considerable fluctuations in the financial markets, which were largely due to the uncertainty over when the Federal Reserve will begin phasing out its quantitative easing. There was also uncertainty over what effects the problems in the Chinese banking sector would have on the Chinese economy and also, as has been the case for a long time now, over developments in the euro area. Economic developments in the euro area are still marked by the need for the private and public sectors to reduce their debt, which is a process that will of course take a long time. However, compared with one year ago, developments had been in the right direction in most of the problem countries and a number of measures had been taken that led to interest rates  BIS central bankers’ speeches  1  falling to lower levels. Our assessment in July was based on the assumption that the reform process would continue and the forecast was that GDP growth in the euro area would remain weak but gradually increase. However, the slow recovery means that GDP will not reach the same level as prior to the decline in 2009 until 2015.
Monetary policy needs a more long-term focus As I see it, we need to make it clear in the monetary policy analysis how monetary policy affects the risk of a financial crisis arising and how such a crisis scenario would look. As financial imbalances usually build up over a long period of time, this means that, in practice, we need to look beyond the three-year perspective that normally forms the base for our forecasts. Monetary policy is already forward-looking, but with a more long-term focus we could also include target attainment in the longer run. So, to what extent can monetary policy affect the probability of a crisis occurring? Well, it is mainly the effect of the repo rate on debt that is important in this context, as the probability of a financial crisis increases when indebtedness is high or when debt increase at a faster rate than normal.2 As the interest rate entails the cost of taking on debt, monetary policy has an effect on indebtedness. In the short-term perspective it seems as though the relationship between the repo rate and household debt is not very strong. However, if households expect the prevailing low interest rates to persist, and therefore increase their debts to unsustainable levels, the effects can be substantial.