The FPC and the PRC are announcing that they will stress test the UK financial system for resilience against different climate pathways. The design of this stress test will start in the autumn, and the tests will be completed in 2021. The stress test will reveal the UK financial system’s ability to withstand the financial risks from climate change that arise from the increased frequency of weather events and from the transition to a carbon-neutral emission economy. The test will motivate firms to address data gaps and to develop cutting-edge risk management consistent with a range of possible climate pathways: ranging from early and orderly to late and disruptive. This test will be the first of its kind to integrate climate scenarios with macroeconomic and financial models. The Bank will develop the approach in consultation with industry, including insurers, and other informed stakeholders including experts from the Network for Greening the Financial System and the PRA’s Climate Financial Risk Forum. With this new supervisory approach, the Bank will help ensure that the financial system is resilient to the risks and can take full advantage of the enormous opportunities in a carbon-neutral economy. The path to a carbon-neutral economy will affect every institution in this country—very much including the Bank of England. We need to do more than just cutting out cups and bringing up bees.35 We must lead by example. From next year, the Bank will become the first central bank to adopt the TCFD recommendations across our entire operations.

Rapid expansion of exports and moderate increase of imports led to improved trade and current account deficits, contributing to foreign currency demand and supply balancing and increased exchange rate stability. Monetary and fiscal policies have conveyed a careful macroeconomic stimulus. Withdrawal of the fiscal stimulus during the second half of the year, led to a more stimulating monetary policy, by reducing the key interest rate in July and a fuller introduction of it into the financial markets during the following period. Financial markets were characterised by an improvement of liquidity indicators and a decline in interest rates in almost all financial instruments. Furthermore, a prudent fiscal policy rendered budget deficit and public debt in line with 2010 forecasts. These developments are expected to be brought forward, in broad terms, in 2011 as well. Economic growth is expected to remain comparable to levels of 2010. However, it is expected to be driven by domestic demand to a large extent. The banking system is in a much better position compared with two previous years in terms of supporting the increase of domestic consumption and investment with funds. Moreover, inflation pressures are forecasted to be under control, budget deficit and public debt are expected to be further consolidated, and external position of the economy is expected to be more stable. Respecting this picture has important implications, which I will address later in more details, for policymakers and economic agents. Latest developments in global economy are characterised by continued economic growth in most developed countries and emerging economies.