However, with greater awareness on the part of employers in the public sector and a low level of activity in some business sectors, the risk that wage growth will again pick up seems to have been reduced. Norges Bank has previously stated that a rapid and pronounced change in the interest rate would be appropriate if, for example, heightening turbulence in financial markets or a cost-push shock resulting from wage negotiations indicate that confidence in monetary policy is in jeopardy. Similarly, it would be appropriate to change the interest rate in larger steps if the outlook points to inflation that deviates substantially from the inflation target over a longer period. We have experienced a period of monetary policy easing. This period is not over. The next assessment of the interest rate will take place at Norges Bank’s Executive Board meeting on 25 June. Our next Inflation Report will be presented at the same time. 8  BIS Review 25/2003
Liquidity can be compared to the ability to pay one’s bills as they fall due. Even if you have large capital, you may not have good liquidity. This is particularly important for the banks. While they receive money from depositors and borrow on the market at fairly short horizons, their lending is usually long term – perhaps 30 years or more for a mortgage. This ability to transform short-term saving into long-term loans is the banks’ main function in society. It enables companies to invest and households to buy their homes. Normally, a shortage of liquidity does not present a problem. Withdrawals from bank accounts follow normal patterns and the banks are able to monitor this. If special needs arise, the banks can manage the situation by selling assets and thus acquire cash. Normally the banks have also been able to manage their short-term borrowing without problems. But during the crisis problems arose on many markets. In some cases there were quite simply no buyers at all and market funding ceased functioning. And as the banks had become dependent on short-term borrowing, there was little they could do when their financiers decided it was safest to demand their money back. Money the banks could not get hold of. In these situations there is not much a bank can do. The usual remedy is liquidity assistance from the central bank. But most central bank make tough demands regarding collateral for lending money to banks with liquidity shortages.