It’s unsurprising, as the IEO noted, that with such a small number of observations there are still open questions about the QE transmission mechanism and impact, and we have welcomed the IEO’s recommendations about how the Bank might continue to advance its understanding. To make matters more complex, we also recognise that the effects of QE are likely to be state contingent, meaning that there is no single “effect of QE” (Figure 5).16 But based on my reading of the academic evidence and my practical experience as a UK policy maker, and consistent with the findings of the IEO report, my central view is that QE achieves its goal of supporting demand and inflation. We have good evidence that it does indeed lower interest rates, through a combination of portfolio balancing, signalling and market liquidity channels. And while the specific contribution of the different channels is still uncertain and much debated, there is increasing evidence that the associated reductions in borrowing costs and accompanying increase in household wealth does feed through to increases in GDP growth and inflation.17  There are, of course, other important considerations regarding the broader impact of QE. For example, as the IEO’s report notes, there has been significant public debate about the possible spillovers associated with QE, with a particular focus on the potential for distributional effects.18 While this topic is not the focus of my remarks today, I would emphasise that the Bank continues to take the analysis and communication of potential side-effects from its policy interventions extremely seriously.

– The new capital requirements require balance sheet rebalancing of internationally active banks, i.e., increase of the capital or reduction in risk weighted assets. Given the still slow recovery process that would be an obstacle for faster increase of capital (through reinvested earnings or new capital injections) this may have implications for the availability of finance. One related issue is the exclusion of minority stakes from consolidated group capital and its implications for the process of deleverage as well as for the development and liquidity of local equity markets (change in the nature of acquisitions). – “Retrenchment in specialty finance due to higher risk weights for certain finance instruments would be particularly harmful to the growth outlook of the region. Some of the sectors most exposed to the retrenchment process are specialty finance lines, particularly infrastructure finance and trade finance. Infrastructure finance is characterized by long maturities, heavy use of syndication, and dependence on long-term dollar funding that makes it particularly exposed to deleveraging” – Cost of finance – “The cost of finance in the region could increase due to inherent inconsistencies in the treatment of sovereign exposures at the solo and consolidated levels. Host supervisors typically apply low risk-weighting for exposures to the host sovereign. However under the forthcoming set of EU regulations, higher risk weights on these exposures could result in a higher cost of finance in the host jurisdiction”. The second channel of transmission is related to the Basel III liquidity framework.