Domestic demand for equipment goods could even turn out to be the most severely affected component of final demand. Developments have been slightly different for the construction sector and its most important component, residential investment. Housing construction has been in decline for the past few years, although the cut in interest rates could now halt this trend. All these factors have brought about a sharp deterioration in business confidence, which should put a damper on job creation in our country. Unemployment will start to rise again. Consumption should continue to grow, but at a considerably slower pace. The household sentiment indicator was sharply down at the beginning of the fourth quarter, reflecting expectations of greater job insecurity. In contrast, the unexpected fall in inflation will contribute to an increase in real income, which will support consumption. For 2009 as a whole, the SNB is forecasting a decline in real GDP. This decline is likely to lie between 0.5% and 1%. Changes in monetary and financial conditions As I mentioned in my opening remarks, the target range for the three-month Libor has already been cut by 175 basis points in three steps since our September assessment. These successive cuts were rendered necessary by a number of factors that contributed to a tightening of monetary conditions, whereas the deteriorating general economic environment  2  BIS Review 157/2008  called for relaxation.

8  All speeches are available online at www.bankofengland.co.uk/speeches  8  8  backed by a government indemnity . The Bank’s exposure then consists simply of an overnight loan to that subsidiary, matched against its primarily short-term liabilities (Table 2 illustrates this using the last published accounts), and the government has a natural hedge for its indemnity in that changes in interest rates have partly offsetting effects on the value of the indemnity and the cost of new debt issuance. The other task for the second line financial risk function is to ensure that there is adequate transparency for policymakers, government and the public over how the exposures can change over time, under different scenarios, so that future decisions are made with full information. That is done – as it has been since the onset of quantitative easing – through multiple channels, including periodic internal reports to the Bank’s Court and HM Treasury, and external analysis and data, including in the Bank’s Quarterly Bulletin and the 9  BEAPFF annual accounts. As of January 2017, the fund had generated about £ in net interest income, sufficient to cover the mark-to-market impact of a material increase in interest rates. Table 2: 2015/16 Bank of England and BEAPFF balance sheets  10  8  For more details, see the Bank of England Asset Purchase Facility Fund Limited Annual Report at http://www.bankofengland.co.uk/publications/Documents/other/markets/apf/boeapfannualreport1606.pdf. 9 Not including unrealised mark to market profits. Data available in Appendix A of https://www.ons.gov.uk/economy/governmentpublicsectorandtaxes/publicsectorfinance/bulletins/publicsectorfinances/jan2017. 10 See http://www.bankofengland.co.uk/publications/Documents/annualreport/2016/boereport.pdf and http://www.bankofengland.co.uk/publications/Documents/other/markets/apf/boeapfannualreport1606.pdf.