BIS Review 119/2009  3  The winding down of extraordinary measures has started In Norway, it has been appropriate to start winding down the unconventional measures earlier than in other countries. In recent months, liquidity has not been supplied through the currency swap lines or liquidity in foreign currency. Loans at long maturities have not been provided since February – several of the loans have now matured. As the markets are now returning to normal, the supply of liquidity will be adjusted so that the money market rate reflects the key policy rate. We want the banks to redistribute liquidity in the interbank market. The underlying structural liquidity in the banking system, i.e. liquidity excluding Norges Bank’s liquidity provision, has been negative in recent years. Structural liquidity was influenced by ingoing and outgoing payments via the government’s account in Norges Bank and is projected to increase ahead, primarily because the government can partly finance increased lending to state banks, payments from the Government Bond Fund and the State Finance Fund and share subscriptions by drawing on their large deposits in Norges Bank. The banking system’s demand for central bank loans can then decrease considerably. The swap arrangement involving covered bonds in exchange for government securities has made a considerable contribution to securing banks’ long-term funding. This spring we saw that the covered bond market started to reopen. The minimum price in the swap arrangement is thus adjusted to the interest rate forming in the market.
Moreover, a higher interest rate aimed at influencing the housing market would not eliminate the source of repeated credit cycles. There is a risk of a bubble in both the housing and the foreign exchange market when credit growth is high, as observed in Iceland and Hungary and perhaps even New Zealand in the years prior to the financial crisis. Interest rates were high in national currencies, but households and enterprises chose to borrow in low-interestrate currencies. 9 There was probably a sentiment of euphoria in the Norwegian housing market in 2006 and 2007, but the boom was financed by loans in NOK and not foreign currency. Should we seek to avert bubbles in the housing market even when medium-term inflation prospects are moderate? On this point, it is our judgement that a distinction must be made between giving greater weight to credit growth and house price inflation in the reaction function and defining house price inflation as an independent monetary policy objective. Socalled “leaning against the wind” would not require adjustments to Norges Bank’s approach, bearing in mind our reaction function which already gives weight to asset price movements and credit growth. 10  6  See for example Bernanke, Gertler and Gilchrist: “The Financial Accelerator and the Flight to Quality”, The Review of Economics and Statistics, 78(1), 1996, pp. 1-15. See also Nina Langbraaten (2001): “Formuespriser – konsekvenser for pengepolitikken? (Asset prices – consequences for monetary policy? )”, Penger og Kreditt No 4.