Specific signals from central banks concerning the likely path of the interest rate can result in lower market rates through lower key rate expectations. Risk premiums may also decrease. The Federal Reserve, and recently the Bank of England, have also developed central bank communication by linking any introduction of monetary policy tightening to specific unemployment thresholds. In August, the Bank of England clearly stated that it does not intend to raise the key rate until the unemployment rate falls below 7 percent. But the promise was not without conditions. Significant changes in the prospects for inflation or  10  The forms of forward guidance have been referred to as either «Delphic», after the oracle at Delphi, or «Odyssean», after Odysseus, who bound himself to his ship’s mast to avoid the seductive song of the Sirens. Delphic guidance means only stating what you believe about future interest rates. Odyssean guidance also includes a binding promise about future interest rate developments (see Campbell, J. et al. (2012): Macroeconomic Effects of Federal Reserve Forward Guidance. Brookings Papers on Economic Activity, Spring 2012). BIS central bankers’ speeches  7  financial stability may lead to monetary policy tightening before unemployment falls below 7 percent. 11 In theory, the announcement of such thresholds could be particularly effective when the central bank’s normal response pattern implies that monetary policy would have been tightened before the threshold had been reached.
Banks can reduce lending volumes. Banks can also change the composition of their lending portfolio by shifting into lower risk-weighted assets, by, for example, tightening lending to enterprises and increasing lending to households. Norwegian banks are well on the way to adjusting to new and higher capital requirements, including a countercyclical capital buffer. Developments in banks’ earnings indicate that banks can increase their CET1 ratios by around 1 percentage point a year without reducing lending growth. 5  3  Basel Committee on Banking Supervision, An assessment of the long-term economic impact of stronger capital and liquidity requirements, August 2010. For an updated collection of references to studies of the costs and benefits of macroprudential regulation, see Annex 1 in IMF Working Paper WP/13/167, by Arregui et al. “Evaluating the Net Benefits of Macroprudential Policy: A cookbook”, July 2013. 4  See Norges Bank Memo No. 1 2013 for further discussion and references. 5  In the calculation there is an assumption of an annual increase in banks’ risk-weighted assets of around 4%, earnings in line with 2012 and all profits are used to increase equity capital. It is also assumed that the transitional arrangement is retained and is binding. 4  BIS central bankers’ speeches  Capital requirements and monetary policy The countercyclical capital buffer and the key policy rate are two instruments serving different objectives. The objective of the countercyclical capital buffer is to increase banks’ resilience to losses in a downturn. The primary objective of monetary policy is low and stable inflation.