The persistent decline in long-term rates has been accompanied by a sharp increase in debt levels in many countries. Heavily indebted firms, households and government had to embark on an extensive deleveraging process. Weak growth prospects have restrained the willingness to invest. Heightened uncertainty following the crisis may have reduced risk appetite. The result is that the effect of policy rate cuts has diminished. For the countries that took the lead, a loose monetary policy appears to have worked. In the US, the recovery has been on track for a while and unemployment has declined. Before Christmas, the Federal Reserve raised its policy rate for the first time in nine years. In Europe, the recovery remains hesitant. In emerging economies growth is slowing. Since the beginning of the year, global financial markets have been marked by considerable turbulence, likely owing to increased uncertainty about global economic prospects. The period of low interest rates is likely far from over. The headwinds from the financial crisis are still being felt by many large economies. With both interest rates and inflation close to zero, room for manoeuvre in monetary policy is limited. Central banks will have little left in their arsenal in the face of a new downturn. Other policy areas will then have to take on a greater role. A solid financial system over time An environment of persistently low interest rates may pose challenges to financial stability. Low interest rates are still driving up debt levels, making economies vulnerable to shocks.
BIS central bankers’ speeches  1  With only a few large export industries, changes in Norway’s terms of trade have a greater impact on our economy than on other economies in our region. In the early 2000s, international prices moved in our favour. The fall in oil prices over the past couple of years has changed the picture. We are now faced with the negative implications of a largely oildependent Norwegian economy. 2  BIS central bankers’ speeches  It is not the first time Norway’s terms of trade have taken a turn for the worse. The same thing happened after the First World War and in the 1980s, with severe repercussions for the Norwegian economy both times. The experience gained from these periods has contributed to shaping today’s monetary policy framework. The road from the silver standard to today’s inflation targeting regime has not been without bumps. It is fair to say that monetary policy in the Bank’s first 100 years was fairly successful. The prevailing environment of hyperinflation and a loss of confidence in the value of the currency posed a challenge, but after full silver redemption had been established in 1842, the Bank was able to stand by its promise to honour its own banknotes, first in silver, then in gold. This policy had a stabilising effect on prices. The period is referred to as the heyday of stable money. This period of stability came to an abrupt halt when the First World War broke out.