This is perhaps the toughest challenge for emerging markets in this regard. In particular, a heavy focus on maintaining immediate financial and economic stability can often hinder efforts to deliver these very same goals in the long run. Thus, ensuring that the outcome of such trade-offs turn out favorable to the attainment of monetary and financial stability in the long term is perhaps the toughest challenge for emerging markets in the present context. Ladies and Gentlemen, To conclude, despite the challenges presented above, the overall direction of change in emerging market countries in the past decade is fundamentally reassuring. Much has been achieved in terms of strengthening the monetary framework and financial system development, reducing vulnerability to external shocks through the establishment of sizable foreign reserves cushion as well as significant restructuring of external debt currency denomination and maturity profile. These changes make it more likely that the process towards further global financial integration will bring substantial benefits in terms of growth and fewer risks, in terms of financial distress, and ultimately contribute towards a more stable macroeconomic outcome. And with that note, let me now end my lecture this evening. Thank you. References Aguiar, M. and G. Gopinath (2007), “Emerging Market Business Cycles: The Cycle Is the Trend”, Journal of Political Economy, Vol. 115, No. 1, pp. 69-102. Arbache, J. (2004), “Do Structural Reforms Always Succeed?” United Nations University Research Paper No. 2004/58. Bank for International Settlements.

A 10  https://www.bankofengland.co.uk/-/media/boe/files/sterling-monetary-framework/annual-report-2018-19.pdf 5  All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx  5  key merit of this so-called ‘floor’ system is that it can keep overnight interest rates close to Bank Rate despite large changes in the supply of, or demand for, reserves (Chart 5). And rates have indeed been closer to Bank Rate on average than at any point in the past twenty years (Chart 6).11 The regime in place prior to QE, known as ‘reserves averaging’, was also successful at controlling interest rates when the stock of reserves was relatively stable. But it did not cope as well when demand for reserves spiked and we had to inject large quantities of reserves for liquidity insurance purposes during the crisis. Chart 5: The market for central bank reserves under the current ‘floor’ framework  Chart 6: Gap between Bank Rate and market overnight interest rates  Sources: Bloomberg and Bank calculations  11  Market rates are slightly below Bank rate because most overnight deposits with SMF participants come from businesses without access to reserves: see https://www.bankofengland.co.uk/quarterly-bulletin/2018/2018-q1/sterling-money-markets-beneath-the-surface. 6  All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx  6  Waiting for the exit: (a) The MPC’s QT strategy How will the balance sheet evolve in the future? That depends heavily on the MPC’s monetary policy decisions. The MPC has been clear that its primary policy instrument is Bank Rate, which can move in either direction from its current level of 0.75%.