English summary from the Board of Governors' press conference on July 5
The following is an English summary of the main questions and answers after the formal introduction by the Chairman of the Board of Governors and the presentation by the Chief Economist at the Press Conference on July 5, 2007.
Question: What will be the impact of the Housing Financing Fund’s lower loan-to-value ratio and the cutback in the cod quota?
Chairman of the Board of Governors: The monetary policy statement that I have just read assumes a 17% cutback in the cod quota. This is an assumption by the Bank’s staff and when a final decision on the quota has been made, its impact will be assessed for the Bank’s next policy rate decision. We also describe the Housing Financing Fund’s decision as a sensible first step and it will help. We have previously commented on the changes made in March when the Fund increased its lending potential with a higher ceiling and loan-to-value ratio, so both these steps are positive. That is not to say that a cutback in fishing quotas is positive as such, but conditions for taking account of marine biologists’ forecasts are exceptionally favourable at the moment.
Question: You talked about deteriorating inflation prospects in the next few months and about the Bank taking measures. Would it be an option to raise the policy rate this year?
Chairman of the Board of Governors: The monetary policy statement says that if the current inflation outlook worsens, the Bank cannot rule out responding, but likewise that if the outlook is more positive than now assumed, the Bank would also respond. With a policy rate hike in the former case, but a reduction in the latter case.
Question: Foreign currency-denominated borrowing by households has been widespread and increasing. Now that the króna is so strong, what consequences could a sudden slide in the króna have for households?
Chairman of the Board of Governors: We are pointing out that it is not entirely certain that people are fully aware of the risks involved. It looks very good on paper for people to borrow in foreign currencies at low interest rates, but perhaps without considering the possible risk, not just foreign exchange risk but also interest rate risk, because these loans carry variable interest rates. So is not unlikely that a downswing in the króna could coincide with a change in interest terms. However, we argue that those who could withstand such shocks in the long term should not be at much risk. It is the others who could not respond to sudden volatility in the short run, over a couple of years, for example. They could face severe problems and we feel people need to be warned that “all that glitters is not gold”. These loans do entail a risk and we highlight it because the Bank’s forecast points to the possibility that the exchange rate will turn less favourable for these borrowers.
Question: Have the commercial banks warned people about taking these loans?
Chairman of the Board of Governors: I presume the banks surely draw their customers’ attention to the risks involved. The banks have considered that they are in a weak competitive position against public sector funds under current conditions, which is why they have taken this course. Households’ appetite for loans of this type is understandable, because on paper, the terms are very attractive.
Question: You assume a 17% cut in the cod quota, but what would the difference in the forecast be if a cutback is made in full line with the Marine Research Institute’s recommendations?
Chairman of the Board of Governors: We have not included that in our calculations but you would be talking about twice as large a cutback or so, which of course would dampen pressures in the economy. The fishing year comes to an end around the time we will be making our next interest rate decision, so the conditions will be assessed then along with other factors when the next interest rate decision is announced on September 6.
Question: Is it desirable for the commercial banks to reduce their housing mortgage lending?
Chairman of the Board of Governors: We do not regard the present overheating in the housing market as desirable. In fact the Central Bank was criticised last year for not predicting a huge downturn, but it was unfortunately right, so to speak. This lending has increased pressures, even by more than we expected. We think the Housing Financing Fund’s lower loan-to-value ratio is prudent, and so is cutting back lending growth. We communicated this view to the commercial banks some time ago. Credit growth slowed down, but has been picking up recently.
Question: Do you think the banks will reduce their housing mortgage lending?
Chairman of the Board of Governors: I assume that the banks will take this as a sign of what people are trying to do to ease pressures in this area of the economy. I can only say that our position towards the commercial banks is perfectly clear: they should not step up the economic pressure when it is already so great.
Question: Inflation is more than you had forecast, is the government exerting enough restraint?
Chairman of the Board of Governors: The government exerts restraint through the budget and we have not seen any change in that respect. The new government’s budget will be presented this autumn and we have repeated the importance of reaching the objective of being able to lower interest rates, which we is a priority of the government too. The best course the government can take to help the Bank perform its tasks successfully is to exert restraint on the expenditure side.