As I have mentioned, there is probably less to gain from lower long-term rates in Norway than in countries that have used unconventional instruments to reduce rates. And the effects of such instruments are now also being called into question internationally. The costs are particularly related to financial stability. Persistently low interest rates can induce investors to take on greater risk in the search for yield, bidding up the price of risky investments and pushing down yields to the level of risk-free interest rates. Prices for securities and other assets can be pushed up higher than future income and risk would suggest. High debt ratios create vulnerabilities, increasing the risk of new crises and future losses. Persistently lower interest rates can also hamper necessary structural changes and reduce the economy’s growth capacity. Debt becomes easy to service, even for unprofitable enterprises. Projects that generate low returns can be debt-financed. Chart: Fiscal impulses The strategy pursued by other countries of stretching the limits of monetary policy must be viewed in the light of monetary policy being practically the only instrument applied. Fiscal policy has made a scant contribution or pulled in the opposite direction. There are probably a number of reasons why this is the case. For some countries with high government debt, the risk of rising interest expenses restricted fiscal room for manoeuvre. At the same time, fiscal policy is managed at national government level.
Jon Cunliffe: Monetary policy one year on Speech by Sir Jon Cunliffe, Deputy Governor for Financial Stability of the Bank of England, to the Cambridge Society for Economic Pluralism, Cambridge, 28 October 2014. *  *  *  My appointment to the Bank of England was announced in July 2013, at about the same time we first had official data in showing the UK economy growing strongly. I joined almost exactly a year ago on 1 November, shortly before the inflation data for October came in showing a 0.5pp drop to 2.2%, the biggest fall in over 18 months. But as always in economic policy making one has to distinguish between correlation and causality. The latter is nearly always uncertain. Indeed, as an economic policy maker, especially a forward looking monetary policy maker, one must accept one is almost always making policy under conditions of considerable uncertainty. Perhaps that is why you so often hear from monetary policy makers about puzzles and how “the data are unusually difficult to read this month”. Our job on the MPC is precisely to make judgments about the future on the basis of imperfect information. To decide when we have enough to act and when it is better to wait. And to adapt those judgments as the economy evolves. Against that background, and on the occasion of my first anniversary at the Bank, I want tonight to review how the economy has evolved over the last year against what was expected when I joined the MPC.