Concerns that household or government debt will weigh on demand could cause firms to delay further their already weak investment spending (Chart 8 – see annex). Such rational corporate caution is consistent with the behaviour of many financial asset prices, which appear to be pricing the possibility of material downside tail risks, such as that economic weakness and persistently low global inflation become mutually reinforcing.11 This fear of fear itself might be reflected in other asset prices too; in particular those that measure or are influenced by inflation expectations. Along with measures from household surveys, some of these have fallen in recent months.12 Those expectations matter as they feed into the wage and price setting processes that ultimately determine inflation. That is why central banks are keenly alert to the possibility that low inflation could de-anchor mediumterm inflation expectations, increasing the persistence of inflation. 10  In UK-weighted terms, global output is estimated at 2% below potential. 11  Yields on sovereign bonds remain exceptionally low. In the six months to January, estimates of the equity risk premium rose by over 100bps in the UK and the euro area back to levels last seen in the heart of the crisis – December 2008 for the UK and June 2012 for the euro area. In addition, the probability of large declines in equity prices implied by options prices rebounded during 2014. Discussed in Carney, M (2015), “Fortune favours the bold”, Lecture to honour the memory of The Honourable James Michael Flaherty, P.C., Iveagh House, Dublin.

A data-dependent normalization means policymakers need to see tangible evidence of a solid recovery, prior to any policy tightening. 2/4  BIS central bankers' speeches  Given the fragile recovery policymakers would be best advised to lean on the side of caution. Faced with additional shocks, we believe our priority should be to offer additional accommodation to the economy. However, policy makers should be careful in getting the policy mix right so that potential long-term costs do not outweigh short term benefits. To that extent, we believe: Fiscal policy should provide additional support, subject to existing fiscal space. So far, public sector sin the developed economies have little financing constraints, partly on account of massive injections of liquidity from central banks. The same appears to be true also for the emerging market economies, such as Albania, which continue to enjoy both market access and relatively low financing costs. However, the fiscal authorities of emerging market economies should be mindful on the need to preserve market credibility on the sustainability of their finances. Financial intermediaries – such as banks – have also shared their fair share of the burden. They would naturally absorb a large part of the additional financial costs incurred in case of further shocks. However, financial and macroprudential policies should avoid the temptation of shifting an ever increasing part of the cost on the banks’ balance sheets. Financial stability and a robust banking sector remain paramount for the long-term growth. Finally, monetary policy should offer additional stimulus.