A two-stage strategy was proposed. The first stage is the current flexible inflation targeting. The second stage consists of monitoring credit developments and asset prices and, in special cases, overruling the signals given by the first stage. This is in line with the reasoning above. Statements by the Monetary Policy Committee in the Bank of England last autumn are an example of the emphasis placed on risk factors for future economic developments. In the minutes of the meeting on 9-10 October 2002, the Committee pointed to the build-up of financial imbalances as a factor which implied that the interest rate should be kept unchanged rather than reducing it. Considerable work remains before the available indicators of financial imbalances can be regarded as satisfactory. High credit growth or sharp rises in asset prices alone do not necessarily pose a threat to financial stability. Research conducted by the BIS has shown that periods of strong credit growth, a  3  See, for example, Borio, English and Filardo (2002): "A tale of two perspectives: old or new challenges for monetary policy? ", BIS Working Papers No. 127. BIS Review 25/2003  5  rise in asset prices and a high level of investment will almost always put pressures on the financial 4 system. Earlier banking crises may provide some indication of where the critical levels are. The IMF has shown that bubbles that burst in the housing market lead to a financial crisis more often 5 than stock market bubbles.
The analyses show that a credit gap of more than 4 percentage points can predict almost 80 per cent of banking crises in a selection of countries. In some cases, the indicator also signals some banking crises that do not materialise. Accuracy improves when other indicators are included in addition to the credit gap. The credit gap for Norway was above the "critical" level prior to and during the crisis in the 1920s. This was first due to high debt growth and later to a fall in GDP. During the Second World War, private sector debt fell sharply, but was followed by a catch-up period. The next episode of a high credit gap was in the 1980s, prior to the last banking crisis. The gap is also high today. 4  Borio, and Lowe (2002): "Asset prices, financial and monetary stability: exploring the nexus", BIS Working Papers No. 114. 5  IMF (2003): World Economic Outlook, April. 6  Source: Norwegian Association of Real Estate Agents, Association of Real Estate Agency Firms, FINN.no (Norwegian search database for classified advertising, including real estate, on the Internet) and ECON. 6  BIS Review 25/2003  More sluggish developments in the Norwegian economy have contributed to a sharp rise in the number of bankruptcies over the past year. In spite of the pronounced reduction in interest rates in recent months, we must expect a large number of bankruptcies and somewhat higher bank losses in the period ahead as a result of continued rather weak economic growth in Norway.