UiO Monetary policy unemployment 0702folk.uio.no/sholden/E4325/UiO Monetary policy... · Monetary...

18
Monetary policy & unemployment Econ 4325 - Monetary policy and business fluctuations Guest lecture UiO, February 26 2007 Harald Magnus Andreassen [email protected] 2 Some good advices hRead history hRead economic & financial history hRead history on economic theory (development) hDon’t trust old truths nor old people, and even less new truths – and not mine 3 First Securities ASA h Brokerage/investment bank/merchant bank Equities, corporate Merchant bank – with Swedbank, trading all sorts of int. rate/fixed income instruments 160 employees 22 analysts (the best &…) 7- 8% + af revenues on Oslo Stock Exchange h We are better bean counters, than dreamers h We give goods advices h Our clients appreciates us h We hire business economists all the time, and economists from time to time. Our trainee-program works! 4 The real proof of the pudding: Firsts anbefalinger Oslo Børs Mnd- Uke- (OSEBX) port. Kjøp Salg port. 1999 18% 26% 46% -1% 2000 -2% 6% 40% -9% 2001 -15% -1% 6% -51% 30% 2002 -31% -23% -9% -52% 1% 2003 49% 43% 54% 26% 32% 2004 35% 36% 47% 21% 88% 2005 42% 52% 105% 8% 103% 2006 31% 37% 44% 8% 59% Samlet siden 99 156% 307% 1223% -62% Siden 2001 121% 205% 543% -58% 949% This should not have been possible! First portfolios - 200 400 600 800 1,000 1,200 1,400 1,600 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Sell OSEBX Monthly port. Weekly Port. Buy

Transcript of UiO Monetary policy unemployment 0702folk.uio.no/sholden/E4325/UiO Monetary policy... · Monetary...

Page 1: UiO Monetary policy unemployment 0702folk.uio.no/sholden/E4325/UiO Monetary policy... · Monetary policy & unemployment Econ 4325 - Monetary policy and business fluctuations ... India

Monetary policy & unemploymentEcon 4325 - Monetary policy and business fluctuationsGuest lectureUiO, February 26 2007

Harald Magnus [email protected]

2

Some good advices

hRead history

hRead economic & financial history

hRead history on economic theory (development)

hDon’t trust old truths nor old people, and even less new truths – and not mine

3

First Securities ASA

hBrokerage/investment bank/merchant bank− Equities, corporate− Merchant bank – with Swedbank, trading all sorts of int. rate/fixed income

instruments− 160 employees− 22 analysts (the best &…)− 7- 8% + af revenues on Oslo Stock Exchange

hWe are better bean counters, than dreamers

hWe give goods advices

hOur clients appreciates us

hWe hire business economists all the time, and economists from time to time. Our trainee-program works!

4

The real proof of the pudding:

Firsts anbefalingerOslo Børs Mnd- Uke-(OSEBX) port. Kjøp Salg port.

1999 18% 26% 46% -1%2000 -2% 6% 40% -9%2001 -15% -1% 6% -51% 30%2002 -31% -23% -9% -52% 1%2003 49% 43% 54% 26% 32%2004 35% 36% 47% 21% 88%2005 42% 52% 105% 8% 103%2006 31% 37% 44% 8% 59%

Samlet siden 99 156% 307% 1223% -62%Siden 2001 121% 205% 543% -58% 949%

This should not have been possible!

First portfolios

-

200

400

600

800

1,000

1,200

1,400

1,600

Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06

SellOSEBX

Monthly port.

Weekly Port.

Buy

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The business cycle & markets

hThe stock market

hThe bond market

6

Long term: Real fundamentals decide

A Tobins q, calculated from the balance sheet

7

The Oslo Stock exchange is volatile, it must be oil…

OSEBX and the oil price

Source: Reuters EcoWin

96 97 98 99 00 01 02 03 04 05 06 07 08

US

D/B

arre

l

0

10

20

30

40

50

60

70

80

90

Inde

x

50

100

150

200

250

300

350

400

450

500

OSEBX

Brent

S&P 500 and OSEBX Sector Distribution, July 2006

0 % 10 % 20 % 30 % 40 % 50 %

Materials

Telecom

Utilities

Cons Staples

Energy

Healthcare

Cons Disc

Industrials/Other

IT

Financials S&P 500OSEBX/Synthetic Index

8

But wait a bit: OSE is even more dependent on aluminiumor India??

OSEBX and Bombay SE Index

Source: Reuters EcoWin

97 98 99 00 01 02 03 04 05 06 07 08

Inde

x

0

2500

5000

7500

10000

12500

15000

Inde

x

50

100

150

200

250

300

350

400

450

500

Bombay SE Index

OSEBX

OSEBX and Aluminum

Source: Reuters EcoWin

97 98 99 00 01 02 03 04 05 06 07 08

USD

/tonn

e

1200

Inde

x

100

200

400 Aluminium

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In the end: The OSE is dependent on the cycle abroad!

Global growth

Oil Raw. Mat alum. Shipping

OSE

India (China)

10

A big swinger

Oslo Børs Pris/Bok

Source: EcoWin, First Securities

86 88 90 92 94 96 98 00 02 04 060.75

1.00

1.25

1.50

1.75

2.00

2.25

2.50

2.75

94

96

98

100

102

104

106

108

11

A quite close connection

Source: EcoWin, First Securities

12

The stock market vs. actual earnings

Not only a long term connection!!

Oslo Børs: Indeks vs. inntjening pr aksje

Source: EcoWin, First Sec.

84 86 88 90 92 94 96 98 00 02 04 06

OSE

BX

10

20

40

80

160

320

Rec

urrin

g EP

S

0.7

1.4

2.8

5.6

11.2

22.4 EPS

Indeks

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Interest rates vs the cycle. Not that difficult??

14

For investors: The long end vs. the short end

15

Asset allocation: The cycle is important!

Source: EcoWin, First Securities

FIRST

16

What am I looking at?

hDemand cycles (”Keynes”)− C, I, G-T, X-M

hSupply cycles (Real business cycle)

hWhat’s most important?− Markets are mostly “Keynesian” (animal spirit, risk appetite, financial

condition, monetary/fiscal policy impulses/responses)− Late followers of fashion? Or realistic, what works?

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Household, corporate net financial investment (cash flow)

Source: EcoWin, First Securities

65 70 75 80 85 90 95 00 05-7.5

-5.0

-2.5

0.0

2.5

5.0

7.5

10.0

-7.5

-5.0

-2.5

0.0

2.5

5.0

7.5

10.0 In % of GDP

Output gap

'Savings'

Recessions shaded

What’s driving the cycle

1 Bad times

2 Soft landing

3 ’Happy’ days

18

G-T, quite important – with the ‘right’ sign!

h Keynes is of course dead, but…Source: EcoWin, First Securities

Recessions shaded

19

Not only in the US

20

Not only in the US…

vs. GDP output gapFinland Private sector net financial investments

Source: EcoWin, First Securities

78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08-12.5-10.0-7.5-5.0-2.50.02.55.07.5

10.012.5

-12.5-10.0-7.5-5.0-2.50.02.55.07.5

10.012.5

Source: OECD/First

Net fin. investment

Output gap

In pct of GDP

vs. GDP output gapSweden Private sector net financial investments

Source: EcoWin, First Securities

78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08-7.5-5.0-2.50.02.55.07.5

10.012.5

-7.5-5.0-2.50.02.55.07.5

10.012.5

Source: OECD/First

Net fin. investment

Output gap

In pct of GDP

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The supply side

Source: EcoWin, First Securities

Short term cycles: Capacity utilisationLong term cycels: Technology ++

22

When does the cycle turn down?

1) Shortage of labour – wage inflation, price inflation− Central banks are forced to hike (too much)− Corporate profits squeezed

2) Private or public sector spending cuts (also without higher rates)

− Corporate over investments, on borrowed fundsInventory cycles

− Too low household savings

− Public deficits

3) Bad luck (wars, terror, plague or cholera, or an oil chock)

23

A global fall in the unemployment rate

hGrowht has beem well above trend everywhere

Source: EcoWin, First Securities

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 060

2

4

6

8

10

12

0

2

4

6

8

10

12

FIRST

Per cent of the labour force

24

The world is new!

World GDPDeveloped vs. emerging markets

-1.00.01.02.03.04.05.06.07.0

65 70 75 80 85 90 95 00 05 10

Contribution from rich countries and poor,of which China

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But how new is the world??

26

A new world? The short term Phillips curve

27

A new world?USA Productivity, nonfarm business sector

Source: EcoWin, First Securities

78 80 82 84 86 88 90 92 94 96 98 00 02 04 06-7.5

-5.0

-2.5

0.0

2.5

5.0

7.5

10.0

12.5

-7.5

-5.0

-2.5

0.0

2.5

5.0

7.5

10.0

12.5

y/y

q/q, annual rateNormal/low productivity growth

High wage inflation

High growth in unit labour cost

High GDP inflation

.. and core CPI inflation well abovenormal

USA Unit labor cost vs. GDP price deflator

Source: EcoWin, First Securities

83 85 87 89 91 93 95 97 99 01 03 05-2

-1

0

1

2

3

4

5

6

-2

-1

0

1

2

3

4

5

6 Change y/y

GDP price deflator (core)

Unit labour cost, non farm bus.

28

Still not any disaster!!

USA KPI Energipriser vs. andre priser

Source: EcoWin, First Securities

65 70 75 80 85 90 95 00 05-20

-10

0

10

20

30

40

50

0.0

2.5

5.0

7.5

10.0

12.5

15.0

Energi

KPI samlet

KPI eks energi

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.. And the Fed is not that preoccupied with the CPI

Source: EcoWin, First Securities

FIRST Fed easing shaded

30

… it’s the economy, stupid!

31

The cycle, business surveys are more important

When does the Fed start cutting?US - ISM vs. Fed funds

Source: EcoWin, First Securities

85 87 89 91 93 95 97 99 01 03 05 07-2147

-2147

Fed funds - 5y CPI

37.540.042.545.047.550.052.555.057.560.062.565.0

37.540.042.545.047.550.052.555.057.560.062.565.0

FIRST

ISM

oo o

Fed cutting shaded

o

32

By the way: What drives earnings expectations?

Source: EcoWin, First Securities

FIRST Recessions shaded

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EMU: Falling unemployment but still low wage inflation

34

EMU: Low wage inflation, low cost inflation, low inflation

Source: EcoWin, First Securities

35

Inntjeningsforventingene ikke så utsatt i EMU?

Source: EcoWin, First Securities

FIRST

36

Interest rates are on their way up but still low?

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More liquidity in the system

38

Some asset inflation

39

What if?

40

Somewhat interconnected?

hHowever: Inflation is not a common problem, not imbalanceshChina, India much more important than before

Source: EcoWin, First Securities

US recessioins shaded

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Some others are still saving!

Estimates based on saving ratios, housing investmentsHousehold net financial investment

Source: EcoWin, First Securities

80 82 84 86 88 90 92 94 96 98 00 02 04-5.0-2.50.02.55.07.5

10.012.515.0

-5.0-2.50.02.55.07.5

10.012.515.0

FirstUSA

Germany

Japan

Husholdningens finansinvesteringer, anslag

42

A special case?

h Hvilken strek er et snitt av 30 OECD-landh Hvilken strek er en liten åpen, oljeavhengig…. økonomi?

BNP OECD vs. Fastlands-Norge

Source: EcoWin, First Securities

78 80 82 84 86 88 90 92 94 96 98 00 02 04 06-3

-2

-1

0

1

2

3

4

5

6

-3

-2

-1

0

1

2

3

4

5

6

FIRST

Vekst år/år

43

BNP OECD vs. Fastlands-Norge

Source: EcoWin, First Securities

80 82 84 86 88 90 92 94 96 98 00 02 04 06-3

-2

-1

0

1

2

3

4

5

6

-3

-2

-1

0

1

2

3

4

5

6 Vekst år/år

FIRST

Fastlands-Norge

OECD

A special case?

44

The economy is firing on all cylinders

Private demandDeviation from trend, % of Mainland GDP

-6%

-4%

-2%

0%

2%

4%

6%

1979 1982 1985 1988 1991 1994 1997 2000 2003 2006

Mainland business

Households

Petroleum inv.

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Fiscal policy: Slightly expansionary

Structural budget deficit ex. oilvs spedning rule

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

1995 1997 1999 2001 2003 2005 2007 2009Sources: Ministry of Finance, First

Oil revenue spending rule

In per cent of GDP

Actual deficit

Norway - Fiscal policyvs. GDP (Mainland)

-6

-4

-2

0

2

4

1980 1985 1990 1995 2000 2005 2010*) Change in ex. oil structural deficitSources: Ministry of Finance, OECD

Per cent

Output gap (OECD/FIRST)

Change in deficit in per cent of GDP *)

And will remain so

46

’G’ not that important vs. the private sector

Privat og offentlig etterspørselAvvik fra trend, % av Fastlands-BNP

-8%-6%-4%-2%0%2%4%6%8%

10%

1980 1984 1988 1992 1996 2000 2004 2008-8%-6%-4%-2%0%2%4%6%8%10%

Forbruk + investeringer, inkl olje

Offentlig etterspørsel

First

47

Savings: The flip side of spendings

The credit market important?Liberalised credit in the 80’ies, ultra low rates now?

Source: Reuters EcoWin

OECD/First

48

Strong credit growth, house price boom

House prices vs. Norges Bank's forecasts

Source: EcoWin, First Securities

01 02 03 04 05 06 07 08 09-5

0

5

10

15

20

-5

0

5

10

15

20

NB's forecasts

yoy growth %

Fuelled by historically low interest rates!

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Seen it before?

50

It might be a new world. But it might bee too low rates too.

Household debt, Norges Bank's f'castsDebt in % of disp. income ex. insurance int. income

100

120

140

160

180

200

220

240

260

1980 1985 1990 1995 2000 2005 2010

FS 03/2

FS 04/2FS 05/2

Forecasts from Financial Stability Reports

FS 03/2 - high

First/Norges Bank

FS 06/1

FS 06/2

51

Some asset inflation

52

Housing starts at 23 year high

Housing starts vs. order book

Source: EcoWin, First Securities

88 90 92 94 96 98 00 02 04 0612.515.017.520.022.525.027.530.032.535.037.5

25

50

75

100

125

150

175Real orders: Adjusted for cost of building

Housing starts

Orders, volume

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Capacity utilisation is record high! Norway Resource shortages in manufacturing

Source: EcoWin, First Securities

84 86 88 90 92 94 96 98 00 02 04 0610152025303540455055

10152025303540455055 Indicator & trend, seas. adj

SSB/First

Deviation between actual and potential productionOutput gap

Source: EcoWin, First Securities

70 75 80 85 90 95 00 05 10-6-5-4-3-2-101234

-6-5-4-3-2-101234

Ministry of Finance

% of potential GDP OECD

Norges Bank

54

Remarkable improvement in the labour market

Norway - Labour market

Source: EcoWin, First Securities

84 86 88 90 92 94 96 98 00 02 04 060.10.20.30.40.50.60.70.80.91.01.1

1

2

3

4

5

6

7

8

9

Vacancies

In % Unemployment, incl. measures

Labour market is tight, despite dynamic labour immigration

Open unemployment rate at 18 year low

Norway Employment

Source: EcoWin, First Securities

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06-4-2024

-4-2024

Change % y/y

1.972.042.112.182.252.322.39

1.972.042.112.182.252.322.39 In millions

55

Consequently: Wage growth is definitely picking up

Norway - Wage inflation, private sector

Source: EcoWin, First Securities

98 99 00 01 02 03 04 05 06 07 082

3

4

5

6

7

8

9

10

2

3

4

5

6

7

8

9

10

Wage cost per hour (Nat. acc)

Annual wage (TRC)

Change y/y

Wage index, average

Est

Vacancies/unemployed vs. wage growthNorway: Wages vs. the labour market

Source: EcoWin, First Securities

80 82 84 86 88 90 92 94 96 98 00 02 04 06 080.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

23456789

101112

no\v-u-lonn

V/U ratioWages "TRC"

Est.

Quarterly statistics, National accounts & tax payments indicates wage growth on the rise

Norway Unemployment vs. wage inflation 1994 - 2007

2.02.53.03.54.04.55.05.56.06.5

1.0 2.0 3.0 4.0 5.0 6.0Unemployment (Aetat)

Wag

e in

flatio

n (T

BU)

2006

19942005

Norges Bank est(incl. pensions).

First est t

2007

56

Productivity might be slowing down, unit labour cost no doubt increasing

Norway - Unit labour cost vs. CPI

Source: EcoWin, First Securities

78 80 82 84 86 88 90 92 94 96 98 00 02 04 06-2.5

0.0

2.5

5.0

7.5

10.0

12.5

15.0

-2.5

0.0

2.5

5.0

7.5

10.0

12.5

15.0

Unit lab. cost business x energy

Growth y/yCPI/CPI-ATE

Norway Mainland GDP, productivity

Source: EcoWin, First Securities

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08-3-2-1012345678

-3-2-1012345678

Mainland GDP, business ex energy

Productivity (GDP/hours worked)

y/y, smoothed

Less reason to woory about’too low’ inflation

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We know Norges Bank’s reaction function

Norges Bank rate vs. unemployment

Source: EcoWin, First Securities

97 98 99 00 01 02 03 04 05 06 07 08

1

2

3

4

5

6

7

8

92.0

2.5

3.0

3.5

4.0

4.5

Unemployment, NAV %

Norges Bank deposit rate, scale inverted

Norges Bank behind the curve?

Mind the gap!

58

The monetary policy dilemma

hHigh GDP growth, the supply side has turned out to be more flexiblethan assumed

hStrong growht in credit and house prices

h… but inflation has been low, and well below target

hAn now, pressure on capacity is no doubt strengthening − Lower unemployment, increasing wage growth

h… but inflation remains far below target

What should Norges Bank then do?

59

”The problem”: Inflation is too low

Change y/yNorway Inflation measures

Source: EcoWin, First Securities

96 97 98 99 00 01 02 03 04 05 06 07-2

-1

0

1

2

3

4

5

-2

-1

0

1

2

3

4

5Headline CPI

Sources: SSB, First

Mainland GDP deflator ex energy

CPI-AT

Is inflation too low?

Really?

60

Bom, falleri, falleri, bom, bom

Norges Bank CPI-ATE estimates

-0.5

-

0.5

1.0

1.5

2.0

2.5

3.0

jan.02 jan.03 jan.04 jan.05 jan.06 jan.07 jan.08

IR 2/02 IR 3/02

IR 1/03

IR 2/03

IR 3/03IR 2/04IR 1/04

IR = Inflation ReportOutcome

IR 3/04

IR 1/05

IR 3/05

IR 2/05

IR 2/06IR 1/06

IR 3/06

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Inflation expectations on the rise

Expected inflation 2 - 5 years ahead

2.25

2.50

2.75

3.00

1 kv 02 1 kv 03 1 kv 04 1 kv 05 1 kv 06

Average economists, businesses and employer's org

Kilde: tns Gallup/Norges Bank

High capacity utilisation, higher inflation

Companies pricing plans

-10-505

101520253035

1 kv 02 1 kv 03 1 kv 04 1 kv 05 1 kv 06

Net share of companies that report prices will rise faster

Source: tns Gallup/Norges Bank

62

Norges Bank is trying!

Norwegian interest rate(s)

0

4

8

12

16

1820 1840 1860 1880 1900 1920 1940 1960 1980 2000

Kilde: Norges Bank/First

Average

63

Even so, Norge Bank is speeding up

Inflation reports in 2006Norges Banks rate projections

Source: EcoWin, First Securities

04 05 06 07 08 091.502.002.503.003.504.004.505.005.50

1.502.002.503.003.504.004.505.005.50

IR 2 2006

IR 1 2006

IR 3 2006

64

… but the bank is way behind the curve?

Interest rates and growth

Source: EcoWin, First Securities

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09123456789

1011

123456789

1011

Nominal GDP-growth (Mainland)

3 m. money market rate Norges B's paths

Nov 06

Mar 06

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65

Norges Bank policy rate at relatively low levelsCentral bank rates

Source: EcoWin, First Securities

00 01 02 03 04 05 06 070

1

2

3

4

5

6

7

8

0

1

2

3

4

5

6

7

8

Sweden

Norway

EMUUSAUK

New Zealand

AUS

Norges Bank policy rate

Source: EcoWin, First Securities

95 96 97 98 99 00 01 02 03 04 05 06 07 08 091.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

FIRST NB projection IR 3/2006

Neutral rate estimat

Low relative to other countries…

…and relative to “normal” levels

66

A stable connection?

NOK TWI vs. interest rate diff.

Source: EcoWin, First Securities

Jan05

Apr Jul Oct Jan06

Apr Jul Oct Jan07

949596979899

100101102103104-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

2 y swap vs. trading partners

NOK TWI

67

But what about the exchange rate?

hWe don’t need 4 pp more than the others this timehThe NOK is not strong; the world, the corp sector & the stock

market ishThe oil prce is higher, we ‘need’ a stronger currency

68

In December 2002: Norway at the topPengemarkedsrente

Source: EcoWin, First Securities

SVE NOR EMU CAN UK USA AUST NEW Z ISL0123456789

101112

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Desember 2002

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Now: Norway is close to the bottomPengemarkedsrente

Source: EcoWin, First Securities

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What is important for the NOK exchange rate now?

NOK vs. oil, interest rates

Source: EcoWin, First Securities

02 03 04 05 06 07

-15.0

-10.0

-5.0

0.0

5.0

-15.0

-10.0

-5.0

0.0

5.0

Oil price contribution

Interest rate contribution

90.0

95.0

100.0

105.0

110.0

90.0

95.0

100.0

105.0

110.0 FIRST NOK actual (TWI)

Model, est from 2005

2 år swap rate differanse: 1pp diff + 2% on NOK

71 72

Conclusions – monetary policy

hThe Norwegian economy is over stimulated by the strongest world ec. growth in 40 years and the lowest interest rate in 200/60 years

+ an oil boom

hThe labour market is tightening rapidly, wage inflation in the rise− Even if immigration is record high

hUnusual rapid increase in credit & house prices show that borrowing cost is low

hA substantial fall in private sector savings

h Inflation is low, and might remain low (we expect it up)

hBut is low inflation enought to keep rates well below a neutral rate? NO! Risk analysis is important!