This does not mean we cannot do better, nor does it mean we need not do more. There is no cause for arrogance. I hope the worst will soon be behind us. Honoured guests: One repercussion of the past year's swift rise in inflation is the plunge in households' and businesses' real interest rates. Unfortunately, the Central Bank's brisk rate hikes have not sufficed to correct the course. Yes, real rates on new non-indexed, variablerate mortgages were 3 - 4% before the pandemic, fell to zero during the pandemic, and are now negative by 2%. Real rates on older fixed-rate loans are even more negative. Real rates on new non-indexed, variable-rate business loans were 3-5% before the pandemic. They fell to zero in 2021 and are still there. At the same time, real rates on deposits range between -5% and -10%. So in a way, history has repeated itself. Inflation and negative real rates have subsidised business investment and home purchases, and transferred wealth from depositors to leveraged households and businesses. Such a situation is unsustainable in the long run. The Central Bank has pushed against household debt collection with all its might. The Bank's financial stability measures have entailed tightening mortgage requirements by capping loan-to-value ratios and debt service-to-income ratios. These measures have helped cool the housing market and temper household demand for credit. They have supported monetary policy and reduced the likelihood that borrowers will end up in financial distress when conditions grow tighter.
The stage was therefore set for the floodgates to open and private consumption to come gushing back as soon as public health measures were lifted early in 2022 and consumers had an opportunity to exercise their purchasing power. The objective of all economic policy is to maintain equilibrium in the domestic economy, to ensure that there is "neither too little nor too much", to paraphrase Thorbjørn Egner's When the Robbers Came to Cardamom Town. During the pandemic, economic policy leaders had to take on the biggest contraction in output since the end of World War II, followed by an abrupt turnaround and a torrent of demand together with an unexpected jump in import prices. The first half of the job keeping the economy up and running during a deep downturn - went well. But the second half - restoring equilibrium after the pandemic - is turning out far trickier. The surge in inflation that followed the pandemic took the world's central banks by surprise. Early on, there was talk of a temporary adjustment - inflation would evaporate, and quickly, too. That proved to be wishful thinking. On that front, Russia's invasion of Ukraine - with the associated surge in commodity, fuel, and food prices and disruption of supply chains - had a serious impact. The unfortunate fact is that inflation has hit double-digit levels in many parts of Europe. Every central bank on the continent is still in a monetary tightening phase.