BIS Review 67/2004  1  As a representative of the Riksbank, I have reason to be positive about the increasing competition since it improves efficiency in the market. Perhaps there is cause to hope that the competition in the future will also give rise to new instruments with which households can manage their interest rate risk. Here I think that the developments have much to offer. The factors discussed above, which affect supply and demand in the housing market and mortgage market, go a long way towards explaining the developments in both housing prices and household borrowing. This is not the case in all countries. In the markets where prices have risen sharpest, for example in Australia, the UK, Spain and Ireland, it is also very common to see housing as a financial asset, as opposed to somewhere the buyer intends to live. These countries have so-called buy-to-let markets, which involves buying a second house or apartment with a view to letting it. Buyers hope that the property will rise in value in much the same way as a share, yielding a return in the process. In Dublin the situation has got to the stage where rents have dropped in recent years, which should have resulted in falling house prices. But prices have continued to climb.
A jump in import demand for construction materials threatens to rekindle inflationary pressures on global commodities, reversing the current downtrend that began last year. Heightened commodities prices will add to higher input costs for global manufacturers, whose margins are already under pressure from elevated wages. If manufacturers pass on these higher production costs, we could see an increase in goods price inflation. At a time when services inflation is proving stubborn, a resurgence in goods prices will negate the hard-fought gains in the nascent disinflation process. The third uncertainty is fresh shocks to food and energy prices. Lower global food and energy prices have largely facilitated the fall in global headline inflation so far. But the nascent disinflationary trend may be interrupted by a rise in food and energy prices. For instance, in January this year, firm food and energy prices elicited strongerthan-expected inflation outturns. Upside shocks to food and energy prices can emanate from a few sources. Unfavourable weather conditions could dampen agricultural yields. This happened in Asia in January. The fall in OPEC oil output remains a factor underpinning some firmness in oil and gasoline prices. An escalation in geopolitical tensions could contribute to bouts of volatility in commodity prices. So, what does all this mean for financial markets? Financial markets may take a while to adjust to this new regime of higher interest rates, and that adjustment may not be smooth. We witnessed last year how such a disorderly adjustment could unfold, when central banks raised interest rates at an unprecedented pace.