In ten years time, we may therefore know whether “global imbalances” and “low risk premia” were resolved with or without stress; and we may be better informed on whether the changes in the structure of our financial markets help or hinder the preservation of stability. A benign outcome would be more likely if the industry were to maintain its efforts on improving ex ante measures to handle stress. Managers of hedge funds and other modern investment vehicles, as well as banks, have a clear stake in that work. Annex: Vehicles CDO: Collateralised debt obligation. Typically, a structured finance product where a SPV issues notes backed by, or referenced to, a portfolio of underlying assets. The notes issued are tranched by seniority into senior, mezzanine and equity. The underlying assets could be corporate bonds, loans or structured finance securities (such as mortgage-backed securities or notes issued by other CDOs), and they might be owned either directly or synthetically via credit default swaps. CDO squared. A CDO invested in CDO tranches, typically mezzanine tranches of synthetic CDOs. CDPC: Credit Derivative Product Companies. A highly-rated limited purpose company, with permanent capital, that sells credit protection on individual names or synthetic CDO tranches. CDPCs differ from monolines in that they write protection only via credit default swaps. They are in some respects akin to synthetic banks. Closed-end fund. An investment company that issues shares to investors and invests the proceeds in a pool of assets typically stocks and/or bonds.

It has provided the platform needed going forward to restrain inflation pressures, and to maintain anchored inflation expectations, at a time when, understandably, there is public debate about the outlook given that CPI inflation rose above 3% for the first time, triggering an open letter from the Governor, on behalf of the Committee, to the Chancellor. Looking ahead, my votes, and my approach to communicating our monetary strategy, will depend on balancing the medium-term prospect for demand pressures alongside uncertainties about supply conditions and near-term inflation expectations caused by volatility in energy costs. This will entail making judgments about a whole range of influences, including whether or not residual slack in the labour market might in time, given robust business investment, help to ease capacity constraints; whether or not competitive conditions amongst retailers will dampen the feed through of accelerating producer prices into consumer prices; and, most crucially of all, whether wage bargainers and price setters recognise the absolute determination of the Committee to maintain price stability. Risks to the global capital markets If anchored inflation expectations have so far been maintained, here and elsewhere, two other risks in, and for, the global financial environment continue to preoccupy commentators: current account imbalances; and compressed risk premia, together with an apparently high risk appetite, in credit markets. There are, I would suggest, some interesting contrasts between these two risks, which – following the Bank’s Financial Stability Report – I shall call “global imbalances” and “low risk premia”.