samchain/econo-pairs-v1 huggingface dataset:
But while spending on retail goods has been virtually flat since last autumn, total consumer spending, including services and utilities, has continued to grow, though quite slowly. And while the prospects for consumption are clearly important, so too are those for other key drivers of the economy, such as business investment and net exports. The question is: if consumers decide to save more, are the conditions in place for other sources of demand to take up the slack? The answer depends in part on what is happening in the rest of the world. Plainly, developments in the rest of the world will influence domestic monetary policy. The UK is a very open economy, exposed to trends and shocks that affect supply as well as demand, and our financial markets are fully integrated with global markets. Sterling is one of the world’s most liquid currencies, and the FTSE 100 is heavily weighted with multinational companies. Let me give one example of what this can mean in practice. Over recent years, the progressive shift toward sourcing from low cost producers has been depressing import prices, and improving the terms on which we trade. This has exposed domestic producers to intense competitive pressures, but it has been unambiguously good news for consumers. And it has probably meant that the MPC has been able to set somewhat lower interest rates to meet its inflation target. The establishment of global markets in key asset classes has created complex linkages between economies as well as facilitating better risk sharing.

And oil option prices – admittedly a very imperfect measure – suggest that there is a 15% probability of oil prices rising above $ a barrel and a 5% probability of them falling below $ in six months time. If oil prices rise no further their impact on headline inflation should be temporary. But a series of positive oil shocks might have the effect of pushing up headline inflation for an uncomfortably long period. In contrast to the 1970s and 1980s, inflation expectations in major oil consuming nations have been well anchored for the best part of a decade. But there’s no room for complacency. The unfamiliar experience of higher inflation might well dislodge those expectations, if there was any wavering incentral banks’ perceived commitment to keep inflation low. This could also prove damaging to consumer and business confidence. 2/3  I claim no special insight into the oil market, and especially into its likely short term movements. But it is hard to miss the longer term challenges which the rapid economic development of China – and India – pose for resource markets, and especially energy markets. China is now the world’s second largest oil importing country after the US, and last year alone it accounted for nearly a third of the net increase in world oil demand. In per capita terms, its own oil resources account for less than 10% of the world average. Yet its oil demand is set to grow strongly in the longer term.
And it is differences in those judgements across the members of the MPC that lead to the finely balanced vote outcomes like that we saw last week. Guiding monetary policy by the stars In discussing those judgements – and, in particular, in converting them into monetary policy decisions about Bank Rate – I am often confronted by questions about ‘starred variables’ in the standard new Keynesian model. In highly stylised form, three starred variables lie at the heart of these models: Pi-star, the steady state rate of inflation; R-star, the Wicksellian neutral real rate of interest; and Y-star, the potential level of economic activity. Pi-star is the easiest to dispose of. Within an inflation targeting framework, the steady-state level of inflation is determined exogenously by the central bank’s mandate. In that context, the inflation target should be as clear as possible: uncertainty about the target only adds unnecessary – and costly – volatility into the economy. The UK’s inflation targeting framework delivers on this score. The inflation target is defined as an annual rate of CPI inflation of 2%, which is given primacy in the remit delivered to the Bank of England by the Treasury and deemed to hold at all times. 9  All speeches are available online at www.bankofengland.co.uk/news/speeches  9  While there are inevitably times – like those we are experiencing today – when unforeseen shocks to the economy drive inflation away from target. These circumstances beg questions about how quickly it is feasible and/or desirable to return inflation to target.

The public deficit of the euro area has shrunk from 6.3% in 2009 to 4.1% in 2011. At the current juncture, this is clearly an asset for us and an element of confidence both for the markets and  BIS central bankers’ speeches  1  economic agents, and needs to be further enhanced. In addition to these efforts at the national level, a much stronger framework for common discipline has been put in place, which represents a major step forward towards a more integrated economic union. It is crucial that all of the efforts in this area are pursued with determination. Now turning to competitiveness, here too the progress already made in terms of structural reforms and the adjustment of unit production costs in many countries is very encouraging. Never in the recent past have the European economies been reformed so much in such a short space of time. I could cite many examples, in Spain (labour market and financial sector reforms), Italy (pension and services market reforms) and in France, where an important pension reform was made in 2010 and where structural reforms on the labour market and on the goods and services market are in preparation. These structural reforms constitute the necessary foundation for dynamic and sustainable growth in the future and they must be vigorously pursued. Furthermore, at the European level, the new Stability Pact includes a surveillance mechanism for macroeconomic imbalances, which had been missing up till now.
But, for me, the case for independence is at least as strong as for monetary policy.23 If anything, decisions on withdrawing the punchbowl are harder, and even more important, during raucous credit parties. Thirty years on, the transformation in the policy-making structures and technologies for financial stability are every bit as great as those for monetary policy. An entirely new system of macro-prudential regulation is now in place, fusing together the micro and macro, the economic and the financial. Through the FPC and PRC, the Bank’s brain and hands are now synchronous. Beer and wine now mix just fine and the jumper-with-tweed-jacket combination is the height of policymaking fashion. In 2012, the Queen and Prince Philip visited the Bank. My colleague Sujit Kapadia used the opportunity to answer the Queen’s question soon after the crisis – “Why hadn’t anyone seen it coming?” Sujit set out the reform steps taken to avoid a repetition. The Royal couple took, I hope, a degree of reassurance. On the way out, the late Prince Philip turned and said: “Oh, just one last thing – don’t do it again”. I think the institutional framework now in place gives us a realistic hope of making good on his request. More than a decade on from the crisis, the financial system is a fundamentally different animal - leverage far lower, liquidity far higher.24 The UK’s largest banks’ activities are protected, additionally, by a ring-fence and systemic surcharges.

The overall assessment of inflation, based on an unchanged instrumental rate, accordingly pointed to a risk of the inflation target being exceeded as economic activity became stronger. Moreover, the high inflation expectations contributed to excessively high wage settlements in the spring of 1995. It was partly this—not the price effects from budget consolidation—that warranted the upward adjustments of the instrumental rate from August 1994 to July 1995. Transitory effects again conditioned the rate of inflation during 1996 and 1997 but now in a downward direction via falling house mortgage interest costs. The krona’s appreciation, in connection with the rapid enhancement of confidence in budget policy, also tended to lower the CPI. Had the Riksbank continued to reduce the instrumental rate—after the earlier cuts had had a transitory downward effect on inflation’s current rate—it would have tended to destabilise the economy. The Riksbank would, as it were, have been chasing its own tail, with interest rate cuts that became increasingly large and frequent. Inflation expectations and actual inflation would ultimately have risen, obliging the Riksbank to swing to a markedly restrictive stance. As interest rate increases also have transitory effects on inflation, the Riksbank would BIS Review 5/1998  -4-  again start to chase its own tail but now in an upward spiral. This illustrates how absurd it would be to raise or lower the instrumental rate as a response to the direct, but transitory, effects of the Riksbank’s own monetary measures.
Otherwise it would hardly have been possible to obtain political support for the public funds needed. The unwillingness to adopt an equally strict approach in many Asian countries has presumably been a major factor behind the difficulties in dealing with the problems there. The central bank’s primary function in this context is to provide emergency lending for acute needs in order to avoid a systemic crisis and aid the work of the new authority. The experience from bank crises clearly demonstrates the importance of incorporating such emergency lending in the general structure for crisis management instead of treating it as a separate measure. This has to do with the great difficulty in practice of distinguishing between liquidity support and support motivated by problems with solvency. At the Riksbank we have made very concrete preparations in this field. We have, for example, produced manuals specifying who is to do what and how in various conceivable crisis situations. Before turning to monetary policy, permit me finally to underscore that I am well aware of the difficulties of various kinds, not least of an institutional and political nature, that exist at the European level when it comes to composing a clear set of rules of this type. At the same time this conference has strengthened my belief that a development towards a more integrated European banking system can be swift. The least we can do is to prepare ourselves on the national level. It will probably help us managing a crisis at the European level if one would emerge.

But to my mind, the absence of a well thought-out position, with clear principles and rules, does not do away with moral hazard problems. They are still present under the surface. Ultimately it will be the tax-payer who stands to lose if actions are not well-prepared and policy is not coherent. This is our experience and I know it is also the view of, for instance, my Finnish and Thai colleagues. The strategy adopted by the Swedish authorities almost a decade ago worked relatively well. But in the absence of clear examples from other crisis management, it was arrived at by improvisation without any rules to rely on. The fact that the result was so satisfactory and the crisis could be resolved so quickly was presumably in large measure a consequence of the profound economic crisis generating a willingness to cooperate, both among politicians and in society in general. 1  BIS Review 85/2000  However, you cannot relay on that kind of spirit of cooperation, which means that a clear structure must have been established for managing acute problems. There has to be a clear division of labour between the competent authorities. The authorities concerned must have thought about the different situations than can arise and how to cope with them. In a draft legislation that was presented recently, a specific procedure, called public administration, is proposed for the reconstruction and winding up of banks. This should provide a credible way of managing problem banks that could jeopardise the entire system.
24  Independent monetary policy and national financial market policy more limited One consequence of the financial markets having become more integrated is that financial capital can move faster and more freely than before and this tends to even out interest rates between countries, see Figure 3. 25 This can in turn limit the national central banks’ possibilities to affect inflation and resource utilisation. According to the theory of the so-called monetary policy trilemma, it is not possible to combine an independent monetary policy with free movement of capital and a stable exchange rate. Moreover, economists have recently pointed out that it might not be possible to combine an independent monetary policy with free movement of capital even with a floating exchange rate. 26 If the financial conditions are largely determined by the outside world, the choice in actual fact concerns either having an independent monetary policy or free movement of capital. The monetary policy trilemma may thus in reality be a dilemma. According to another trilemma, the so-called financial trilemma, it is not possible to combine national financial market policy with financial integration and financial stability. 27 One can choose two of these three things, but all three cannot be attained simultaneously, see Image 2 for an illustration. The financial trilemma is based on the effects of the banks’ cross-border operations. If the banks become less dependent on the economic conditions in their own countries, this can on the one hand contribute to spreading out risks and therefore even out households’ and companies’ incomes.

If a bank sells a portfolio with mortgages, the capital requirement is less binding and one has scope to give new loans. So far, however, securitisation has not been as common in Sweden as in, for instance, the United States or the United Kingdom. Moreover, it has become less common since the global financial crisis. However, new products are being created all the time, that can entail risk. Recently, for instance, there has been a focus on SPAC (Special Purpose Acquisition Company). Instead of taking a bank loan when starting a company, one forms a ‘shell’ company that takes in money and then buys a company. Market financing increases sensitivity to disruptions in the financial markets Many companies have begun to rely on market financing to a greater extent than before, that is, they issue their own commercial paper or corporate bonds instead of obtaining financing through bank loans. And this makes the companies more sensitive to disruptions on the financial markets. Around one third of the companies’ loan financing is currently in this form, see Figure 4. There are probably several factors behind this development. For instance, the low interest rates have increased investors’ willingness to take risk and demand for corporate bonds. However, more structural changes have also made it easier for companies to issue 31 See Rajan (2005). 14 [35]  bonds, such as the increased demand from asset managers, insurance and pension companies, which in turn reflects an increase in household wealth.
Firstly we need to be clear why we are pursuing a particular deliverable. Is it a market failure justifying any intervention at all? What real impact will the work have on fulfilling our mandate? How closely does it relate to the “must dos”? Secondly we need to think through the costs, benefits and risks associated with the action from the points of view of both likelihood and impact. What will be the risks to society, the economy and even the Bank if we do not do it? How might these risks be reduced if we do do it? How well placed are we to do it as opposed to others? How confident are we of achieving the intended deliverables – particularly when we need to rely on others? Do we have influence to ensure action is taken? The answers – difficult as they may be to define – help us in prioritising and resource allocation; and provide sunset provisioning in deciding whether to continue with particular strands of work. 5. Ongoing Activities: The Matrix  i)  Uses for the Matrix  There are many types of activity, and many sources of threat where we could be active. So we need organising principles to make sense of where particular actions fit into the landscape of our financial stability work. It is only then that we can evaluate competing priorities, by subjecting each “bid” to a common set of challenges. To do this we find it helps to use a simple matrix.

In view of the existence of political barriers to international trade, the flow of capital and goods was equally as possible one hundred years ago as it is today. It goes without saying, however, that as a result of the rapid development of technology, especially in the ICT area, which drastically lowered the cost of the said exchange, the international integration of trade, investment, financial and other services is now more advanced than it has ever been before. In recent years globalization “tail wind”, mainly through increasing competition, productivity and growing imports from low-cost countries, helped to reduce inflation in CEE countries. HICP inflation in the region 2 fell from average 7.7 percent in the years 1997-2000 to 3.8 in 2001-2006. It led to a prolonged period of very low nominal and real interest rates. Nominal interest rates (average for CEE countries with flexible exchange rate regimes) have fallen from 8.8 percent during 2002-2005 to 5.4 during 2006-2007. Real rates decreased from 3.0 to 1.7 in the same period. This in turn helped to accelerate credit growth and fuelled asset bubbles. The amount of loans granted to households increased 3.5 times since 2004 and almost 10 times since 2000. Low deposit rates and economic upturn in CEE after EU accession encouraged both financial institutions and individuals to move toward more risky forms of investment. As a result, real estate prices soared after 2004 and equities listed on stock exchanges reached historical highs.
Third, the UK authorities are improving the procedures and information needed to manage systemwide risks should they crystallise. The Bank, the FSA and HMT now conduct regular crisis management exercises to develop the coordination needed to handle operational disruptions and financial crises. Market-wide testing of business continuity arrangements takes place annually. It involved some 70 firms and utilities in 2005 and another test is about to start. Finally, the changing financial landscape has increased the importance of international crisis cooperation. An MoU to develop such coordination in the EU amongst central banks, finance ministries, and regulators has been established and tested. We need to build on that to reach beyond Europe and to test crisis management arrangements especially with US authorities. Taken together, these measures should help reduce the likelihood of systemic instability in the UK. I hope that my remarks today help make clear that the private sector – through sound individual and collective risk management – has its part to play in lengthening those odds still further. 6  Recent work at the Bank has been exploring this issue. See, for example, the analysis in Wells, S (2002), UK Interbank Exposures: Systemic Risk Implications, Financial Stability Review, December, pages 175-182, and Cifuentes, R, Ferrucci, G and H S Shin (2005), Liquidity Risk and Contagion, Bank of England Working Paper No. 264. 7  See Tucker, P (2004), Managing the central bank’s balance sheet: where monetary policy meets financial stability, lecture to mark the fifteenth anniversary of Lombard Street Research, 28 July.

As more instruments that transfer risk are added to the balance sheets of financial institutions, so leverage and connectivity  2  BIS Review 70/2006  grow. While some of these connections might constitute a "perfect hedge", they can leave the system more vulnerable to both counterparty risk and the liquidity of these markets. The precise extent to which market participants are now connected through interlocking obligations is difficult to gauge, but the UK interbank market provides some clues. Over 70% of the total lending in the market is accounted for by 15 institutions. And the major UK banks’ large exposures to the main foreign-owned LCFIs are almost two-thirds of Tier 1 capital. The rising correlation between the share prices of major UK banks and foreign-owned LCFIs also provides a hint of the growing interconnections (Chart 4). At the same time, rapid innovation in new financial instruments poses challenges within the financial system. As I have already discussed, these developments are likely to be positive in the long run, allowing market participants greater scope to diversify and manage risk. But in the short run, newer products, such as structured credit derivatives, do pose challenges. We simply do not have experience of how they behave in the full range of market conditions. The models that have been built by banks and other players in the market to value and hedge positions in these instruments are more sophisticated than ever before, but they are not proven in adversity.
So: another day, another mission. This time in the form of an urgent email, on Sunday 15 March – the day before Andrew Bailey formally took over as Governor. Bank and Treasury, at the highest levels, had agreed to launch a package of financing measures to help struggling UK companies. Much of that help would be provided via the banks, supported by Government guarantee. But to free up capacity at the banks to focus on those who needed them most – including small and medium-sized companies – the Bank would provide marketable debt to the largest, highest-rated firms. Given the credit risks involved, financial exposures and eligibility decisions would be owned by the Treasury, but the scheme – to be known as the Covid Corporate Credit Facility (CCFF) – would be designed and run by the Bank, and funded through the issuance of reserves, with the MPC’s agreement. 9  All speeches are available online at www.bankofengland.co.uk/news/speeches  9  Time was of the essence. The package of measures was announced by the Chancellor 48 hours later, on Tuesday 17 March. And a mere six days after that, on Monday 23 March, the CCFF was open for business: allowing investment grade firms to issue Commercial Paper (CP), via an agent bank, to the Bank at preCovid rates. No public sector scheme can ever reach every firm in need. But the numbers are substantial. Firms eligible for the scheme account for over a quarter of UK corporate turnover and nearly a fifth of UK employment.

And the sheer scale of the balance sheet interventions necessary in recent months pose important longer term questions. About the extent to which the non-bank financial system may still be capable of amplifying instability – for example through sudden non-bank deleveraging, runs on money market funds, or rigidities in dealer intermediation. And about the appropriate balance of responsibilities between the public and private sector for dealing with such vulnerabilities. 2  All speeches are available online at www.bankofengland.co.uk/news/speeches  2  I cannot give comprehensive answers to these questions today. But, in what follows, I have tried to provide some raw material for that exercise, illustrated using seven of the most vivid ‘moments’ from my own experience of the past few weeks. Moment 1: the first rumbles of thunder In the first week of March – the week before that fateful Friday 13th – we at the Bank had decided to move all of our market operations to full split site working, to reduce the risk of Covid-19 transmission. On Friday 6 March, as I was walking across the trading floor saying goodbye, my attention was drawn to a group of our foreign exchange reserves managers staring intently at their screens and talking animatedly. A big adjustment in financial markets had already been underway for some time, as expectations of slower demand caused by the global spread of the virus pulled down on equity and oil prices, and investors moved into safer assets, reducing yields (Chart 1). Market functioning had however mostly held up well.