Lorenzo Bini Smaghi: Inflation and deflation risks – how to recognise them? How to avoid them? Speech by Mr Lorenzo Bini Smaghi, Member of the Executive Board of the European Central Bank, at XXI Villa Mondragone International Economic Seminar “Global Crisis and Long Term Growth: A New Capitalism Ahead?”, Tor Vergata Economic Foundation and CEIS – Centre for Economic and International Studies, University of Rome, Rome, 24 June 2009. *  *  *  Introduction 1 Let me begin by thanking the organisers for inviting me to this conference in Villa Mondragone. It’s a honour to give the “Riccardo Faini Lecture”. Riccardo was not only a great Colleague, at the IMF and at the Italian Treasury, but also a friend. The international economy is going through one of the worst recessions in generations. Demand and output have fallen sharply and synchronously in many developed and developing economies. Unemployment has drifted up. Global trade has shrunk for the first time in almost three decades, leading some to talk about incipient ‘de-globalisation’. Spare capacity has grown, dampening inflationary pressures – in central bank speak, downside risks to price developments have emerged – and fears of a sustained period of deflation are spreading. On the other hand, unprecedented recessionary forces have elicited an unprecedented policy response. Monetary policy has been swiftly loosened, both with conventional and unconventional tools. Governments have embraced aggressive fiscal expansions.

Yet in the decade since LIBOR’s age really began to show, some have clung to the hope that it might just push on. After all, how could such a well-known colleague ever leave? Few can still harbour that illusion after the announcements of recent weeks.3 Subject to the outcome of IBA’s consultation launched last Friday,4 the LIBOR panels for sterling, yen, Swiss Franc, euro and the less heavily traded dollar tenors will cease at the end of 2021. And, although the panels for more heavily used US dollar settings will stick around for a short while longer, to support legacy business, the US and UK authorities have been absolutely clear that new use of these rates must stop at the end of 2021,5 in line with everywhere else. LIBOR’s long career is drawing to an end. It’s time to bow out gracefully. Of course, as with any departure, there’s lots to do to ensure a smooth transition – and I want to highlight three key actions for market participants in the months ahead. 1  https://www.bankofengland.co.uk/speech/2019/andrew-hauser-speech-at-risk-live-2019-london https://www.bankofengland.co.uk/bank-overground/2020/why-do-firms-need-to-accelerate-the-transition-from-libor-benchmarks See ‘The Future of LIBOR’ section at https://www.theice.com/iba/libor and https://www.fca.org.uk/news/statements/fca-consults-onnew-benchmark-powers 4 https://www.theice.com/publicdocs/ICE_LIBOR_Consultation_on_Potential_Cessation.pdf 5 https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20201130a1.pdf and https://www.fca.org.uk/news/statements/fca-response-iba-proposed-consultation-intention-cease-us-dollar-libor 2 3  2  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  2  1. Moving all new business off LIBOR  The first priority is to break the remaining grip of LIBOR on new lending and other business as soon as possible before the end of 2021.