An adjustment in interest rates affects the price of households’ assets, such as housing and thereby wealth, and through this channel has an indirect effect on households’ consumption in the way I just have described. However, an adjustment in interest rates also has a direct effect on households’ purchasing power and willingness to incur debt via interest costs for borrowing. The speed and strength of the impact of an interest rate adjustment on households’ interest expenditure depends to a large extent, as I mentioned earlier, on the size of the debts, the percentage of the loans that are variable-rate loans and the average fixed-rate term for the loans at a fixed interest rate. The percentage of variable-rate loans increased during the 1990s and is currently around 35 per cent of the total debts. The larger the percentage of variable-rate loans a household has, the faster an  1  See pp 15-17, Financial Stability Report 2004:1  BIS Review 51/2004  3  interest rate adjustment will affect interest expenditure. The fact that indebtedness and house prices have increased should thereby have contributed to a more rapid and possibly also a stronger impact by monetary policy on household consumption demand than previously. Do the inflation forecasts contain all of the relevant information on house prices and indebtedness? As I mentioned earlier, the Riksbank’s monetary policy is normally based on forecasts of inflation one to two years ahead.
It seems that one trend is towards disintermediation and a more important role of capital markets, gaining ground to banks, in a global financial system that will probably end up being smaller and more attuned to the size of the global economy. Another trend points to a reduction of financial linkages between national financial systems, as BIS banking statistics, for example, are starting to show. Here, the role of Central Banks’ policies and operations, as well as regulators is crucial, as they must walk a fine line in promoting domestic financial stability without falling into the nets of protectionism, something that would be indeed damaging for growth and prosperity. As we all know, the risk of fragmentation and re-nationalisation of the financial system has materialized at the European level, in the unique institutional context of European Monetary Union; and the solutions to overcome this situation are changing the foundations of the euro. Each of the three sessions which make up the programme will focus on a particular perspective on how the new trends are shaping the global financial system. The crisis and the policy response – in the areas of financial regulation and monetary policy – are generating new patterns of funding, new players and changes in capital flows across global markets. Those issues will be reviewed in the initial session. As I mentioned before, the euro area has to deal with a severe crisis which has led to the fragmentation of the European financial system.