Another possibility is that low long-term rates reflect unusually strong demand for long-term securities, for example, by pension funds seeking to improve the match between the durations of their assets and liabilities, by holders of mortgage-backed securities seeking to maintain the durations of their portfolios, or by foreign central banks that have been acquiring dollars. China may have been playing an especially large role, as its central bank has intervened in foreign exchange markets to peg the renminbi at a low level against the dollar. Of course, last week the People’s Bank of China announced that it had revalued the renminbi against the dollar by 2.1 percent, with the stated intention of managing the renminbi’s exchange value against an unspecified currency basket. This is not a large revaluation, but some observers think that it is the beginning of a much bigger move over time. If this is the case, we may gain a better understanding of the impact, if any, that Chinese exchange rate policy has had on U.S. bond rates. An alternative to “special factors” as an explanation for the low level of long-term yields is the possibility that the flat yield curve reflects the market’s assessment that bad news is on the horizon. In other words, investors may expect only modest increases in the funds rate in the future because they think that the drags I’ve described will keep demand on the weak side for some time to come.
GDP for Mainland-Norway has on average increased by 2.8 per cent annually since 1990. This compares to 1.7 per cent in Sweden, 2.1 per cent in Denmark, 1.9 per cent in Finland and 2.5 per cent in Iceland over the same period. The differences for average GDP growth since 1995 are somewhat smaller. Although GDP growth in Norway was moderate in 2001, capacity utilisation in the Norwegian economy remains high. So far, the impact of the international slowdown on the Norwegian economy has been limited, partly due to high oil prices. Unemployment has been low since the mid-1990’s. Private consumption is expected to remain buoyant due to high wage growth and an expansionary fiscal policy in the years ahead. Prices for domestically produced goods and services are rising fast. Inflation in Norway is being dampened by a close to zero rise in prices for imported consumer goods. The different cyclical developments in Norway are also reflected in the stock market. Norwegian stock prices have become much less correlated with world markets over the last years. The correlation is considerably lower than in the other Nordic countries. The correlation for Denmark is also rather low, but this is partly due to low exchange rate correlation. When looking at the correlations using national currencies, the Danish correlation is higher and more in line with that for Sweden and Finland. BIS Review 47/2002  1  Iceland and Norway have the highest key interest rates among the Nordic countries, at 7.9 and 7.0 per cent respectively.