The effect would then be in practice the same as if the target had been lowered to 1 per cent. With a lower expected rate of inflation the nominal interest rates in the economy, including the repo rate, will on average be lower. This means that in future economic downturns the distance between the repo rate and the lower bound may be smaller than before. If the repo rate hits its lower bound earlier, and remains there for longer periods, it will be a less effective tool in counteracting economic downturns. It will be even more difficult than it is now to bring down the real interest rate as low as one might need. The essence of this is that “preventive” increases in the repo rate would ultimately not result in more ammunition, but less. It is therefore important that increases in the repo rate are not made in such a way that inflation will be tangibly lower and confidence in the inflation target is put at risk. Cut the repo rate further? Another possible means of counteracting an economic slowdown is to cut the interest rate more than to the −0.5 per cent level which has so far been the lowest point. It may be possible to go even lower − for instance, the policy rate in Switzerland is at −0.75 per cent. But personally I think the possibilities here are fairly limited.
As many of you know, governance is an area in which I have been working for some time and with which I am very familiar. Let me recall for you the areas of improvement banks still have to tackle and which decisively influence the business model and future challenges. Admittedly, considerable progress has been made in recent years in relation to governance. But I would like to highlight two areas where we must continue working: i) the functioning of boards; and ii) the implementation of risk appetite frameworks. On boards there is scope for improvement in terms of independence, dedication and succession planning. Many institutions have carried out self-assessments of how their board works, but more still needs to be done as regards the time dedicated to preparing meetings and board oversight of control functions. 6/8  The oversight of managers and, in particular, internal control functions must be strengthened, especially in risks and compliance. And let us not overlook the quality of data and information on risks that are pivotal to determining strategy and decision-making. In addition, work remains to be done on integrating the risk appetite framework into management, as a key instrument of risk control. For example, at many banks the involvement of the risks function in the limit-setting process is still poor and lacking in ambition. In risk management, structured decision processes are needed, with incentive arrangements that are conducive to sustainable risk-related decisions.