BIS central bankers’ speeches  5  Challenges to monetary policy Central banks in other countries are deploying strong measures to buoy up economic activity and inflation. Key interest rates in many countries are close to zero. Central banks in the US, UK and Japan have made large-scale bond purchases and thereby expanded their balance sheets in order to push down long-term interest rates. The European Central Bank (ECB) is still the bankers’ bank – not the government’s bank. But the ECB has also stretched itself, for example by providing long-term loans to banks, which must be seen in the light of low growth in Europe. The EU is working on measures to restore financial market confidence – and public confidence. In March this year, 25 countries are to sign the fiscal compact – an agreement on stricter surveillance of fiscal policy and binding deficit limits. Banks have been instructed to increase their core capital. Both measures could contribute to improved budgetary discipline in the public as well as the private sector the next time they are tempted to overspend. The Norwegian economy is still well equipped to withstand the negative effects of the financial crisis. Oil prices are high and are in large part behind Norway’s favourable terms of trade. Growth is being sustained by high activity in the oil industry. We have room for manoeuvre in economic policy. However, a number of enterprises are feeling the impact of the downturn abroad.
In particular, the Banco de España is now empowered to require that banking institutions establish countercyclical capital buffers by credit segment, limits on concentration in relation to economic activity sectors, and limits and conditions when underwriting new loans (in terms of loan-to-value, loan-to-income and debt service-to-income ratios, and also the maturity, the currency in which the operation is denominated and whether the interest rate is fixed or variable, among others). These new instruments complement those previously available to the Banco de España and included in the European legislation:11 the countercyclical capital buffer, the systemic risk buffer and the buffer for systemic banks, among others. In addition, this year saw the creation of the Macroprudential Authority Financial Stability Council, whose main goal is to contribute to the promotion of coordination and the exchange of information on financial stability issues among the Banco de España, the Ministry of Economy and Enterprise, the Spanish National Securities Market Commission and the Directorate-General of Insurance and Pension Funds). All in all, this new institutional setting is a significant step forward in reinforcing financial stability in Spain. 4. Other policies should also promote economic and financial stability The notion that other economic policies should complement monetary policy and also contribute to economic stability has always been embedded in the design of the European Economic and Monetary Union.