Øystein Olsen: How central banks influence interest rates Speech by Mr Øystein Olsen, Governor of Norges Bank (Central Bank of Norway), at the Centre for Monetary Economics (CME) / BI Norwegian Business School, Oslo, 1 October 2015. *  *  *  Please note that the text below may differ from the actual presentation. Accompanying charts can be found on the Norges Bank’s website. Introduction A number of items appear on my calendar every year. Today’s speech is one of them. Three years ago, the speech was entitled “Monetary policy in turbulent times”. The theme was how central banks worldwide were adopting new approaches to the conduct of monetary policy. Chart: International yield curves Three years later, this theme has not lost its relevance. The list of countries that have adopted quantitative easing has grown longer. Policy rates in some countries have fallen below the zero lower bound, and we have seen examples of negative yields on bonds. This has challenged a long-held belief – that the lower bound for nominal rates is zero. The measures have a common goal, which is to bring down market interest rates and keep them there until a firm economic recovery is achieved. By influencing interest rates on financial contracts of varying duration and risk, monetary policy seeks to stabilise inflation and stimulate output and employment. In this speech, I will take a closer look at how policy rates affect money and financial markets and the impact of the unconventional measures implemented.
It is difficult to judge to what extent the recovery abroad can be attributed to the monetary policy that has been conducted. There is, however, little doubt that it has had a positive effect. Lower interest rates have given firms and households access to cheaper funding. It has also eased the interest burden for heavily indebted borrowers and contributed to growth in disposable income. In addition, the value of households’ financial wealth has increased. This may also have provided a basis for higher demand. Studies conducted so far also suggest that the unconventional measures have had an effect. 13 A study by the Federal Reserve suggests that the Fed’s asset purchase program has reduced unemployment by 1¼ percentage points and increased inflation by ½ percentage point. 14 The Bank of England estimates that the Bank’s purchases of government  12  Jordà, O., M. Schularick and A. M. Taylor (2013): “When Credit Bites Back”, Journal of Money, Credit and Banking (45), 3–28. 13  IMF (2013): “Global impact and challenges of unconventional monetary policies”. IMF Policy Paper, October 2013. 14  Engen, E. M., T. T. Laubach and D. Reifschneider (2015): “The macroeconomic effects of the Federal Reserve’s unconventional monetary policies”, Finance and Economics Discussion Series, Federal Reserve Board, Washington D.C.  BIS central bankers’ speeches  7  bonds from 2011 to 2012 boosted GDP by just over ½ percent. The effect on inflation was also found to be positive.