samchain/econo-pairs-v1 huggingface dataset:
Before rounding off this discussion about monetary policy, let me also touch on the question of publication of minutes, which was brought up in the discussions earlier today. I think this is an issue that has been given too much prominence in recent discussions about clarity and transparency in monetary policy. Clearly, there are positive and negative aspects of publishing minutes. It can influence the internal discussions in both a positive and negative way. It can also have positive and negative effects on the way in which a central bank is perceived. I believe that the publication of minutes has been less important for the acceptance and credibility of monetary policy in Sweden during recent years than the policy framework with published forecasts and a policy rule. Nevertheless, I do think it was right of us to start to publish ours. Concluding remarks Let me conclude by underscoring that there are clearly major differences between the problems we were confronted with in Sweden after our crisis and those confronting European decision-makers today. We started from scratch without any credibility, while the euro was launched in a relatively good setting drawing on the credibility of the Bundesbank. But on the other hand, we had the advantage of having to manage only one country. After five years in European policy circles, I think I understand what Ottmar Issing means when he says that every single language reflects the unique circumstances in the country where it is spoken.

In principle, by relating new information to our most recent forecast, market players are in a good position to form a picture of policy’s direction and we can see that when we compare their forecasts of the repo rate with our own. However, one should be aware that there is a risk that an unduly simple rule or decision-making model will oblige the central bank itself to disregard other relevant information. Monetary policy is not mechanics. For this reason we have elaborated our view in various respects. We have underscored that there are also grounds for considering the periods before as well as beyond the 1–2 year horizon on which we focus. Strictly speaking, it is a matter of optimising over all future time, including both inflation and output. For a long time now we have also declared that there are transitory factors we should disregard; more recently we noted that there can be grounds for weighing a prompt return to inflation’s targeted rate against the risk of avoidable fluctuations in output. Finally, we have said that departures from our simple rule may be warranted by problems with financial stability. What is important, however, is our ambition to provide a clear explanation and motivation for such departures. Given our ambitions in this field we would risk severe criticism if we were to do so without good arguments. I should also say that if our application of the rule would continuously be modified and altered, much of its communicative and educational value would be lost.
To be precise, two key pieces of information - our objective, and our analysis of the economy. Our objective is the 2% inflation target given to us by the Chancellor and plain for all to see. And our analysis of the economy is published in the minutes of our monthly meetings, in more detail in our quarterly Inflation Report, and in speeches by members of the MPC. Knowledge of our objective and our analysis is all that markets need from us to form judgements about the future path of interest rates. Changes in our analysis, and the range of views within the Committee, may well affect the conclusions that financial markets draw about the likely path of interest rates. Markets appear to have been rather successful in drawing conclusions because our decisions on interest rates have not, by and large, surprised them. But there is a big difference between setting out our analysis of the UK economy and dropping hints about decisions we have yet to make. So all those listening to the speeches of MPC members - including this one - for a hint as to the decisions we shall take in the coming months will be disappointed repeatedly. We make up our minds one month at a time. Those, however, who read our Minutes, Inflation Reports and speeches to understand our thinking will mine a richer seam. Knowing our thinking, they will be in a better position to evaluate the implications of developments in the economy for the future path of interest rates.

There is one other arena where clearer rules of the game would be of great value - the Commercial Court. After 13 years, we have at last drawn a line under the BCCI case, the most expensive fishing expedition in history. It ended as a comprehensive victory for the Bank, both on the substance of the case and on costs. The trial set new records - the longest opening speech in English legal history, an even longer reply, and almost certainly the most expensive commercial litigation ever. It is for others to comment on the behaviour of those who brought a case that even they described as a blood sport. I can presume only that they were allowed to play within the rules of the game. In which case, it is the rules of the game that should be questioned. A legal framework for enforcing contracts and resolving disputes is not just an arcane process which allows professionals to earn vast fees, but an integral part of the infrastructure of a successful market  2  BIS Review 61/2006  economy. It matters that there are simple, clear and timely ways of resolving disputes. What the BCCI case revealed was a legal system incapable of guaranteeing that. How can a case described by the trial judge himself as built “not even on sand but on air” take thirteen years and over £ million in costs to come to a conclusion?
Central banks are facing the risk of being considered not only the only game in town, but also the all-purpose game. That said, the reality of climate change, rising inequality – which I will touch briefly – and risks to financial stability – which you invited me to focus on – are all elements to be taken into account, and as such are parts of the ECB’s Strategic Review, more than the Fed’s one. II.A. Climate change Considering climate change is neither a mission creep, nor a mere militant conviction or a fad. It is an imperative: climate change does affect our ability to achieve price stability, our primary objective. On one side, extreme physical risk or more gradual transition risks will, and do already, affect supply. On the other side, the implementation of policies to mitigate climate change such as carbon taxes, emission targets or border adjustment tariffs will also affect input and consumer prices. For example the recent jump in headline inflation in the euro area illustrates these two points. Part of the recent increase in energy prices was linked to higher electricity prices in Spain due to unusually cold weather and the introduction of a carbon surcharge on prices of liquid fuels and gas in Germany. In my view, there are three measures we central bankers can take. vi The first is to incorporate climate change into our macroeconomic models. Second, we must gradually decarbonise our balance sheets in a pragmatic and targeted way by adapting the valuation of our assets.

I will turn to the question of three of the new expectations on central banks, that we at the ECB are currently discussing as part of the Strategic Review rightly initiated by Christine Lagarde. I. Inflation remains the principal edifice of the Central Bank's Construct I.A. The past: had inflation disappeared? When it comes to inflation, the last decade left economists and central bankers confronting a number of puzzles. The Great recession of 2008-09 exhibited a “missing deflation”, when the important contraction of output was not associated with a consequent fall of prices. The recent years, on the contrary, were characterised as a period of “missing inflation”. The vanishing level of inflation has been a pervasive and global phenomenon. It can be grasped with a simple comparison of the inflation rates in the first and the second decades of the 21st century. Page 2 sur 9  The inflation rate of the Euro area was 2.1% on average from 1999 − when the euro was created − to 2007 − when the financial crisis started. It dropped to 1.0% over the period 2013−19 following the double dip recession and until the current pandemic. At more than one percentage point, this is a substantial decline between the two periods. Headline inflation in the US experienced a similar decline, having dropped from 2.7% to 1.6% between the two periods. In the early 2000s, the euro area’s inflation rate was in line with the ECB’s price stability mandate, defined as a target of “below but close to 2%”.
But to calculate the annual inflation rate at that point, we have to compare with the April 2022 bill, which had already risen significantly. Because of this base effect, even if the bill itself goes up to a higher level, it goes up by less over a year than it did in October. The annual inflation rate therefore falls sharply from 96% to 52%. The contribution to consumer price inflation from the energy bill will nearly halve. Chart 2d: Typical household energy bill Smaller of Ofgem energy price cap and Energy Price Guarantee  Page 8  Looking further ahead, say to April 2024, the outlook is more uncertain. Wholesale energy prices have come down markedly over the past few months. If they develop as futures prices now suggest, it is likely that Ofgem’s energy price cap will fall below the Energy Price Guarantee. The numbers shown here are guesstimates, but they illustrate that we might expect household energy bills to start falling. This means that annual inflation in the typical bill will eventually turn negative as the bill drops below what it was a year earlier. Energy bills will start to drag directly on overall annual consumer price inflation. But as you can see, this does not mean that we should expect household energy bills to come down to previous levels any time soon. And from a cost-of living perspective, it is the level of what people have to pay that matters.

For a period of time – even perhaps a few years – wages can rise somewhat more without jeopardising the inflation target – for example, if the ratio of wages to national income is unusually low following a crisis and businesses are able to absorb some of the increase. This has been the case to an extent in the past few years. Other factors could counteract larger wage increases as well – for instance, declining foreign-currency prices of imports and a stronger króna have contributed to declining inflation even though wages have risen considerably more than the sum of the inflation target and the increase in productivity. But there are a number of indications that we will not be able to rely on these countervailing factors next year. By then, the slack will have disappeared from the economy, the ratio of wages to national income is at or above its historical average, and there are no premises for further appreciation of the króna, as the current account surplus is narrowing and the real exchange rate is no longer below its estimated equilibrium value. Nevertheless, different wage increases could be negotiated for different groups if there are grounds and will to do so. As I draw near the conclusion of my talk today, I would like to shift gears a bit and say a few words about credit ratings.
One thing I would like to close on is to talk a bit more broadly about issues related to Thailand beyond the financial sector. Firstly, I would like to start by saying thank you. Thank you in the sense that policymakers in Thailand recognize that we are where we are today, largely thanks to our friends from Japan. Our success in building an export-driven economy is owing to the large inflow of Japanese foreign direct investment that came to us after the Plaza Accord. Over the years, such investment has contributed significantly and substantially to the improved living standards in Thailand today, and again, thank you for that. I think our partnership is something that we both benefited from as Thailand benefits from the partnership with Japan, and Japanese firms have also benefited from being here in Thailand. We recognize that things are different now, and the reasons that brought you here to Thailand back then are probably not the same reasons that will bring in new investment today. Therefore, we need to look a bit beyond and think about a new investment thesis for Thailand. Back then, we were a rapidly growing economy in the years before the Asian financial crisis, growing at a rate close to 10 percent a year. People were talking about Thailand becoming a newly industrialized economy at that time. That story is very different now, but I do think Thailand is still a good place to do business.

Under this initiative, four member economies of APEC - China, Thailand, Mexico and the Philippines - have volunteered to receive expert advice through visits from panels of experts. The objective of these visits is to assist the economies in question in identifying potential impediments in their markets and in removing these impediments through specific, achievable and monitored action plans tailored to the individual economy. The programmes under this initiative are making good progress, and, in addition to the panel visits, two policy dialogues have been held to promote understanding and experience-sharing. A second cluster of initiatives, under the ASEAN+3 forum, involves a variety of studies known as the Asian Bond Market Initiative (ABMI) on issues such as new securitised debt instruments, issuance of debt by international financial institutions, regional credit guarantees and enhancement facilities, and the establishment of local and regional credit rating and credit enhancement agencies. The third set of initiatives falls under EMEAP - the Executives’ Meeting of East Asia-Pacific Central Banks - and takes the form of bond funds aimed at channelling a small portion of the very large official reserves held by the Asian economies into the region. The first of these funds - Asian Bond Fund I (ABF1) - was launched in June 2003 and is now fully invested in US dollar-denominated bonds issued by sovereign and quasi-sovereign issuers in the EMEAP economies. The EMEAP Central Banks are currently working on ABF2, which will invest in local currency-denominated Asian bonds.
However, the inherent weaknesses in Libor making it a less reliable and more volatile rate are more accurately captured by three linked factors: The lack of underlying transactions on which to base the rate; The use of expert judgement to supplement the rates where actual transactions are not available; and, The impact of the underlying liquidity dynamics of the markets being referenced. To address these weaknesses, alternatives to Libor need to address all of these factors and not just reducing the likelihood of the application of judgement. With banks moving to greater use of retail deposits and secured funding, rather than short-term wholesale interbank markets, Libor increased its reliance on transactions grounded in the commercial paper (CP) and certificates of deposit (CD) markets. This increased Libor’s vulnerability to short-term illiquidity effects apparent in these markets and the amplification of price moves. We have seen how liquidity in these markets can fall away rapidly leading to sharp moves in rates that reference them during periods of stress – most recently during the market reaction to the Covid-19 pandemic last year. For example three-month USD Libor rose by over 50 basis points in the second half of March 2020, at a time when observable transactions were diminishing and official US rates were reduced by 100 basis points. Outflows from money market funds (MMFs) were a key driver of the frictions underpinning Libor during March 2020. Credit quality was not the primary concern given the regulatory reforms to money market funds post the 2008 crisis.

Descending safely: Life after Libor ‐ speech by Andrew Bailey | Bank of England  Page 3  While it is always the right choice to install the safety net to break your fall in the form of fallbacks, this shouldn’t be seen as a substitute for pre-emptive action, ensuring a sure footing on the descent. Active transition ahead of LIBOR cessation remains an important part of easing the gradient of that descent – it ensures contractual certainty and allows borrowers, lenders, issuers and investors to retain economic control over their contracts. GBP bond markets are again leading the way, as we have seen over 50 bonds with a value of around £ billion actively transitioned from GBP Libor to SONIA. [8] Where tough legacy contracts are able to take advantage of that safety net, for example in the form of the proposed synthetic Libor we should be clear that this a temporary solution. [9] Supervisory engagement will continue after the end of this year to ensure regulated firms continue to manage that rump and move those exposures onto robust alternatives where that is possible. As those facilities re-new, in most case they should move to the most robust rate available, where we expect the most liquidity to be – in sterling that will be SONIA compounded in arrears. The use of forward looking term risk-free rates Let me now turn to the critical element of any journey – the destination. The reference rates the market transitions to are important choices.
This makes sense, particularly in view of the special liquidity requirements I have already mentioned. In addition, we also place funds in small cap companies. In terms of market capitalisation these holdings only account for a small portion of our equity portfolio, but in numbers they make up about three-quarters of all the securities we hold. This, too, shows the breadth of our equity universe. When selecting our equities, we use a benchmark. This is a combination of various commonly used indices, assembled by us. As soon as we have determined the benchmark, equity investment becomes a largely automatic process. Why does the SNB not make targeted investments in individual companies or sectors where an above-average return can be expected? In other words, why do we not engage in stock picking? Warren Buffett is quoted as having said, wide diversification is only required when investors do not understand what they are doing. I can assure you that our investment specialists have an excellent understanding of what they are doing. However, we choose to have recourse to a broad equity universe for the following four reasons. First, we achieve a greater diversification effect within the equity segment by investing as widely as possible, across both regions and sectors. Second, it should not be our objective to enforce strategic or, indeed, political interests by means of our investments in individual companies. This could limit our monetary policy room for manoeuvre and would also make our position vulnerable.

And, so that the growth fostered in this way can create many jobs, structural policies will have to assume the principal role, while the role of monetary policy will then dwindle and fade away - alas - to nothing. BIS Review 67/1997
While risks in property markets reflect national differences, other risks such as misconduct have more common determinants. BIS central bankers’ speeches  3  In the past five years, misconduct penalties imposed on EU banks have totalled € Those costs have direct implications for the real economy. At 5% leverage, that capital could have supported € trillion of lending capacity. More fundamentally, repeated episodes of misconduct undercut public trust in the system.2 The ESRB’s work has helped catalyse sensible actions to begin the process to rebuild that trust. First, it has proposed capturing misconduct costs in stress tests to ensure banks remain resilient even under severe outcomes. The Bank of England has followed this approach in its most recent stress test which included and additional £ of misconduct costs. These costs were calibrated to have a low likelihood of being exceeded and are therefore, by design, much larger than the amounts already provided for by banks. Second, the ESRB has also proposed tackling misconduct at source by increasing individual accountability. This can be done by reforming remuneration – using variable pay, combined with Malus and Clawback, to hard-wire stronger incentives for good behaviour within firms. The UK is committed to this approach with the toughest remuneration regime in the EU, including the longest deferrals and claw backs. However, the effectiveness of such measures across the EU is being tempered by the bonus cap.

Building stronger macroprudential frameworks  The ESRB has promoted stronger macroprudential frameworks across the Union. Specifically the ESRB has issued recommendations to encourage national legislators to establish macroprudential authorities within their jurisdictions. Its Handbook on Operationalising Macroprudential Policy in the Banking Sector embodies practical information on how to set policy using the newly-established powers. The Handbook sets out best practice on an instrument by instrument basis, suggests indicators to guide their use, and outlines the legal framework governing them. It also details potential spillovers. Where it judges that best practice is not being followed, the ESRB can use “soft law” to issue recommendations on an “act or explain” basis to mitigate financial stability risks and curb spillovers. For example, last year the ESRB gave guidance to national macroprudential authorities on how to set countercyclical capital buffer rates. The ESRB will follow up that guidance with a published assessment of implementation in 2016 Q3. With macroprudential policy still in its adolescence, the ESRB is helping it to mature. BIS central bankers’ speeches  1  Recent ESRB studies have evaluated the case for using margining to counteract pro-cyclical behaviour in derivatives and securities financing transactions. And this year, the ESRB assessed the value of including macroprudential buffers within the leverage ratio framework. The Bank of England has followed this approach to ensure that the leverage ratio complements the risk-weighted capital framework in a way that makes it robust to cyclical and structural risks.