An economic turnaround has occurred, with a soft landing after the long period of high cost inflation in Norway and a low level of activity in other countries. But inflation is too low. As mentioned, there are three main factors that have contributed to this. First, the global downturn had considerable implications for the impact of interest-rate setting in Norway. A strong krone contributed to the decline in inflation. The krone has now returned to its previous level so that the effect will be reversed. Second, low inflation in other countries and rapid changes in the international division of labour have resulted in a fall in prices for imported goods and services, even when measured in terms of what Norwegian importers pay in foreign currency. Third, intensified domestic competition also appears to have exerted downward pressure on prices. As a result of both changes in the international division of labour and increased domestic competition, there is idle labour and available real capital in Norway. We cannot rule out that adjustments will be made over a period of time and that these adjustments will encompass a large portion of the domestic economy. Thus, it is possible that the level of output that is consistent with stable inflation will increase. Inflation will remain low in 2004. However, the easing of monetary policy will gradually push up inflation. As mentioned, it may take some time before interest rates in other countries are increased to a considerable extent.
Those costs would ultimately be passed on to European households and businesses. Moreover if the large stock of existing trades of EU firms – tens of trillions of euros in size – was trapped at a CCP which was no longer recognised by the European Commission, those EU firms would face capital charges as much as ten times higher than today unless and until they could move them. 25  Fragmenting liquidity would drive up costs somewhat in the remaining market as well. On current volumes, almost 90% of swaps are traded by non-EU firms and could remain in the main UK-based liquidity pool. Given the size of this market, the impacts could be expected to be much smaller, although not insignificant. Fragmentation is in no one’s economic interest. Nor is it necessary for financial stability. Indeed it can damage it. Fragmenting clearing would lead to smaller liquidity pools in CCPs, reducing the ability to diversify risks and diminishing resilience. And higher costs would reduce the incentives to hedge risks, increasing the amount of risk that the real economy would have to bear. The Bank of England fully recognises European concerns. I know because I shared similar ones as Governor of the Bank of Canada. These were addressed then through common standards and cooperative supervisory oversight, allowing $ clearing to move to a more efficient and resilient hub in London.