The heady days of the Great Moderation were restrained by geopolitical uncertainty. During the financial and euro crises, by contrast, economic uncertainty dominated. And from 2012 onwards, with the abatement of the acute phase of the euro-area crisis, economic uncertainty began to fall back, only to be replaced by renewed geopolitical tensions and now sharply higher policy uncertainty (Chart 4). Chart 3 UK economic policy uncertainty has increased since the global financial crisis, rising sharply higher in early 2016  Source: Bank calculations and Baker et al, (2015), ibid. Chart 4 Three eras of uncertainty: geopolitical from 9/11 to 2008; economic uncertainty from 2008 to 2012; and policy uncertainty today  Source: Bank calculations and authors cited in Charts 1–3 above. Economic policy and geopolitical uncertainty indices are de-meaned and shown relative to their respective standard deviations. Chart shows two-year centred moving average for each measure. 4  BIS central bankers’ speeches  2. What do the combined effects of uncertainty mean? All this uncertainty has contributed to a form of economic post-traumatic stress disorder amongst households and businesses, as well as in financial markets – that is, a heightened sensitivity to downside tail risks, a growing caution about the future, and an aversion to assets or irreversible decisions that may be exposed to future “disaster risk”.7 There may be an affect heuristic at work. Put simply, long after the original trigger becomes remote, perceptions endure. They become embedded in economic narratives and their salience persistently affects risk perceptions and economic behaviour.

The implications for monetary policy will depend on the relative magnitudes of these effects. In my view, and I am not pre-judging the views of the other independent MPC members, the economic outlook has deteriorated and some monetary policy easing will likely be required over the summer. The Committee will make an initial assessment on 14 July, and a full assessment complete with a new forecast will follow in the August Inflation Report. In August, we will also discuss further the range of instruments at our disposal. These judgments will benefit from the Bank’s joined-up approach. For example, the PRA’s direct line of sight of banks, building societies and insurers, and the FPC’s oversight of systemic risks, allows the Bank to understand better the net impact of any monetary actions on financial conditions, and ultimately businesses and households. As we have seen elsewhere, if interest rates are too low (or negative), the hit to bank profitability could perversely reduce credit availability or even increase its overall price. There are also interactions between prudential rules and the provision of credit in the face of large macro uncertainty. The Bank of England is well positioned to understand these interactions and will work across its policy committees to maximise the coherence and effectiveness of their efforts. I can assure you that in the coming months the Bank can be expected to take whatever action is needed to support growth subject to inflation being projected to return to the target over an appropriate horizon, and inflation expectations remaining well anchored.