If supply responds to recovering demand, unemployment will fall more slowly than otherwise and the point at which we will re-evaluate the stance of monetary policy will come later. What of unbalanced growth? The Bank of England is alive to the risks of extended stimulus, and given its responsibility for macro-prudential policy, it can act in a timely fashion to mitigate them. The Bank demonstrated this flexibility recently with a package of measures targeted at the housing market, and it has outlined a broad range of additional tools if further action were required. The synergies of combining the monetary and macro-prudential authorities in one institution could be considerable. By sharing analysis and clearly assigning a hierarchy of responsibilities between them, the Bank’s MPC and its financial policy equivalent, the FPC, are ensuring that measures are timely, proportionate and targeted. For example, the Bank’s Funding for Lending scheme, originally put in place for monetary policy purposes, was refocused from household to small business lending for financial stability purposes. Similarly, both committees have made it clear that monetary policy is the last line of defence against financial stability risks, thereby establishing clear lines of responsibility and accountability. This coordination is particularly important if either of the “secular stagnation” stories is relevant. By addressing risks to financial stability, the Bank’s FPC helps ensure that monetary policy can remain as stimulative as necessary for as long as necessary to achieve its objectives. In doing so, it reduces the risk of a deepening liquidity trap caused by compounding debt-fuelled consumption.

And it helps to lay bare more clearly the underlying growth potential of the economy. BIS central bankers’ speeches  5  The third aspect of the policy response is better financial regulation and supervision. In both the US and UK, the repair of the financial sector was a prerequisite for recovery. Indeed, one of the reasons behind a persistently negative equilibrium real interest rate has been the restricted supply of credit from a damaged banking system. Going forward, financial reforms will help guard against excessive pro-cyclicalities that could emerge in a “low for long” environment. But financial reform is about much more than fixing the failings in advanced economies; it is one of the keys to rebalancing the global economy. The global savings glut will not disappear in the absence of further financial liberalisation in China. That will only proceed if there is a transparent, resilient global financial system worth joining, and will only be completed by further internationalisation of the renminbi. Those realities are key reasons why the Bank of England is so engaged in the work of the Financial Stability Board and has moved to support London as a hub for renminbi clearing. Conclusion For the first time in a long time it seems reasonable to expect the hopes and dreams of the holiday season to be fulfilled. The Ghost of Christmas Present is a cheerful spirit. As uncertainty diminishes, credit conditions improve and balance sheet repair progresses, monetary policy is gaining traction.