samchain/econo-pairs-v1 huggingface dataset:
Page 1  Returning inflation to target − speech by Huw Pill Given at Kings College, London and Qatar Centre for Global Banking and Finance conference  Page 2  Published on 06 July 2022  These are difficult times for many people. Getting inflation back to our 2% target is important if we are to have a stable economy that supports people’s jobs and incomes. Huw Pill sets out how we’re doing that. Speech Good morning everyone. It is a great pleasure to speak here at Kings College and the Qatar Centre. I would like to thank the organisers of the conference for their invitation and hospitality. In my remarks today, I aim to make three points: (1) to emphasise the MPC’s focus on returning inflation to its 2% target;[1] (2) to re-call the drivers of recent inflation developments and how they have shaped the MPC’s policy actions; and (3) to re-state and unpack the MPC’s most recent communication about the outlook for monetary policy decisions. Working through these three points has the character of ‘peeling an onion’: progressively working from the most visible public comments towards more detailed or technical arguments. I hope each of the different audiences that I seek to address today – from the wider public, through the media and market participants, to the experts attending this conference – can find some layer of the onion that speaks to them.

Pill, H. (2022a). ‘Monetary policy with a steady hand,’ speech given at the Society of Professional Economists online conference, 9 February. Pill, H. (2022b). ‘What did the monetarists ever do for us?’ speech given at the Walter Eucken Institut / Stifung Geld und Währung conference, Inflation and Debt: Challenges for Monetary Policy after Covid-19, 24 June. Rudebusch, G. D., and J.C. Williams (2008). ‘Revealing the secrets of the temple: The value of publishing central bank interest rate projections’ in J.Y. Campbell (ed. ), Asset prices and monetary policy, University of Chicago Press, pp. 247-284. Tenreyro, S. (2022). ‘The economy and policy trade-offs,’ 2022 Dow Lecture given at the National Institute of Economic and Social Research, 23 February. 1. The title of my speech is hardly original (see Mann (2022)). Sharing this speech title with one of my MPC colleagues should reassure readers that the Committee is well-aligned in recognising its remit and mandate. 2. See Pill (2022a,b). 3. See the article on the Financial Times, 21 October 2021. 4. See Consumer price inflation, Office for National Statistics  , May 2022. 5. From today’s perspective, it is tempting to reassess policy decisions with the (considerable) benefit of hindsight. This often leads to the conclusion that policy actions should have been earlier and more aggressive. However, such assessments should recognise impossibility of acting ahead of the realisation of an unanticipated (strictly, unanticipatable) shock.
In a world with many banks, it is inefficient for every agent in the economy to have an account with each and every bank. One solution is for each bank in the economy to have an account with all the other banks and to net obligations bilaterally with them. In a world with many banks, this will tend to result in an inefficiently large number of interbank accounts. A more efficient solution is for a hierarchy of banks to develop, with banks at the bottom of the hierarchy having accounts with correspondent banks in its upper tier, which in turn have accounts with banks at the apex of the hierarchy. These banks at the top of the hierarchy were naturally and literally “central” banks. Indeed, there is plenty of historical evidence that hierarchical structures evolved naturally in a free-banking environment without the need for the state to superimpose and/or guarantee a “settlement institution” at the apex of the hierarchy. One example is in fact the Bank of England. The status of a central bank at the top of the hierarchy derived also from the fact that it was perceived to be “safe” – that is, an institution with a large capital base, holding high-quality assets. Such a central bank would also need to be concerned about its own soundness. This led the central bank to be careful about to whom it should provide settlement accounts and to monitor these banks.

If a large bank should experience difficulties, the contagion to other banks and the rest of the economy can be very serious. This is called systemic risk. Banks’ activities have considerable externalities. 7 Few bank failures illustrate this point better than the bankruptcy of Lehman Brothers on 15 September 2008. In the course of the week following the closure of the bank, interbank lending rates soared. Banks distrusted one another. Short-term funding markets, money markets, dried up worldwide. US money market funds experienced payment problems. The spillovers spread throughout the financial system. One of the world’s largest insurance companies, AIG, teetered on the edge of bankruptcy. To prevent the Lehman bankruptcy from ending in the complete collapse of the financial system, the authorities in a large number of countries took measures on an unprecedented scale. Central banks in many countries injected large quantities of liquidity into the banking system to keep the wheels turning. The aim of these measures was to keep the banking system operating so that the rest of the economy would not be impacted. That is why banks are bailed out. The costs associated with closing a bank are largely borne by parties other than the bank itself. We bail out banks to prevent systemic crises. We bail out banks to limit the substantial damage a deep banking crisis can inflict on the economy. Why should banks not be bailed out? But it is not that simple. There are also compelling arguments against bank bailouts.
These projections continue to be contingent on meeting the assumptions for the recovery of the economy as the main prerequisite for the growth of the deposit potential, for forming positive expectations of banks and for greater propensity of the private sector to borrow. In this context, the dynamics of “bad loans” is of particular importance. Comparatively speaking, although their share in the total portfolio is moderate, there is room for improvement in this area, especially in the corporate sector segment. Given the fact that until recently, the granting of loans was concentrated with households, the new credit flows need to be more balanced between the sectors, which implies gradual resolution of the problems with non-performing loans to the corporate sector. The application of the new regulations – the new Basel standards, may also be a medium-term challenge for the banking system. Although the main growth projection for the Macedonian economy suggests relatively dynamic growth during 2015 and 2016, there are risks related to this scenario, mainly arising from the external environment. They are mostly in a downward direction, and it was assessed that they further increased this year. It is assessed that the increase in the short-term risks is a consequence of the growth of geopolitical tensions in the countries of the Middle East and the tensions between Russia on the one hand, and Ukraine and West-European countries on the other.

The development of a single global code for the FX market is a significant effort, but developing a code is not enough. Codes of conduct and associated best practices are an important complement to regulation. They can support the integrity and function of the market by underpinning the smooth operation of the market and instill confidence that participants will treat each other fairly. But this is not possible, or sufficient, if best practices do not evolve as the market evolves, if they are not implemented effectively, or if they are not adhered to by market participants actively engaged in the market. Development of dynamic best practices is critical, as is the market’s adherence. Recent headlines and events paint a picture of an FX market that does not always serve the public well. But you all have an opportunity to change this picture – to support the work to strengthen the market. I encourage you all to make the most of this opportunity. As Guy Debelle noted in his speech in February, the failure to act on the FXBG recommendations may prompt authorities to conclude that further regulation is the only way to strengthen the integrity of the market. 15 Similarly, the Governor of the Bank of England, Mark Carney, emphasized in his recent Mansion House speech that a failure to establish effective common standards that are adhered to would likely result in more restrictive regulation. 16 Consider this message reiterated here today as well.
To highlight the most significant improvements, the Stability Law firstly sets minimum reporting requirements for regional and local government, including monthly revenue and spending outturns for regional governments, and quarterly ones for local governments, along with the information needed to calculate the budget outturn in National Accounts terms. Moreover, since June 2012, the IGAE (National Audit Office) has been regularly publishing quarterly accounts of all general government sub-sectors in National Accounts terms, on an individual basis for regional government and in aggregate terms for local government. Also, since October 2012, the monthly regional government accounts have been regularly published in budgetary accounting terms and, since March 2013, in National Accounts terms. Further, from last March, monthly National Accounts figures on Central Government and on the Social Security System began to be released, complementing the monthly State data in National Accounts and cash-basis terms, and the monthly Social Security System data in cash-basis terms that have been published for more than three decades. Apart from these reporting improvements, the Stability Law includes mechanisms to correct slippage in budget outturn. The Independent Fiscal Responsibility Authority, whose creation is scheduled for the end of this year, will complete this new governance framework. The pension system The sustainability of the pension system is pivotal to the medium- and long-term soundness and stability of public finances and to the very credibility of any consolidation programme for total public spending.

Unlike in other economies with problems of excess household and corporate debt, such as the United Kingdom and the United States, in Spain weak nominal growth has weighed on the process of debt re-balancing and has made it reside, above all, on a contraction in lending. The last year in which lending posted a positive rate of change in Spain was in 2008. Since then, net credit flows, both to households and to non-financial corporations, have been  BIS central bankers’ speeches  3  negative overall, although there was a very slight increase in lending to households for house purchase in 2010. In 2012, total lending to the resident non-financial private-sector fell by 5.8%; credit to households fell by 3.7% while that to non-financial corporations decreased by 8%. When total credit to productive activities excluding construction, real estate development and financial services is considered, the decline was not as sharp, standing at 6%. Indeed, credit to productive activities excluding construction, real estate development and financial services was slightly positive in 2010, but has been negative in 2011, 2012 and in 2013 to date. In considering these developments it should evidently be borne in mind that credit for construction and real estate development activities had to shrink as the cyclical upturn ended and the excesses of the period 2004–2008 had to be corrected.
I should stress that, when undertaking this transformation, banks have most significant starting strengths. Despite all the reputation problems, people continue to trust their bank, much more than any other service-providing company. Personal relationships with customers continue to be very important, particularly in certain segments and age groups. According to the latest Funcas financial innovation barometer, in January this year, customer ties to their main financial institution remained very strong. Close to 90% of banking activity is conducted with the main institution. Also notable is the fact that customers’ perception of quality of innovation and their degree of satisfaction with their institution is high; higher, indeed, that what the managers of institutions themselves think. 12/15  While the proportion is growing, still less than half of Spanish bank customers (4 out of 10) would be prepared to use exclusively digital channels to take out traditional financial products. Assuming a change in institution, traditional banks remain the first option (71%) for moving an account from one institution to another. Fully digital banks would be chosen by 24%, while FinTech are an option for only 3%. Lastly, only the 2% remaining would change their bank for a technological or telecommunications company that offered these services. This starting position, which is a relatively good one from a “defensive” standpoint, should not have us forget that the tendency towards the use of alternative channels is on the rise.

In other words, a 25 basis point tightening would still leave the UK monetary policy stance significantly more accommodative than a year ago. Conclusion  So where does this leave the balance of arguments? Having weighed the evidence, I think that the balance of risks associated with tightening “too early”, on the one hand, and “too late”, on the other, has swung materially towards the latter in the past six to nine months. The risks of tightening “too early” have shrunk as growth and, to lesser extent, inflation have shown greater resilience than expected. And if policy tightened “too late”, this could result in a much steeper path of rate rises later on, contrary to the MPC’s collective expectation that Bank Rate would increase ‘at a gradual pace and to a limited extent’. 25  As the balance point between these risks has shifted over the past 9 months, that has left me judging that a partial withdrawal of the additional policy insurance the MPC put in place last year would be prudent relatively soon, provided the data come in broadly as expected in the period ahead. Certainly, I think such a tightening is likely to be needed well ahead of current market expectations. How soon is “relatively soon”? I considered the case for a rate rise at the MPC’s June meeting. I felt then there were strong grounds for holding back until later in the year, for two reasons. First, despite upwards pressure on inflation, there are still few signs of higher wage growth.
We can thus now also answer the question as to when bank deposits constitute sound money. Having central bank money that retains its value is a key prerequisite for sound bank money. Since bank deposits in Switzerland are denominated in Swiss francs, their value is largely determined by SNB money. Sound bank money therefore hinges on sound central bank money, but that in itself is not enough. Bank deposits are only sound money if the bank in question is also solvent and liquid, in other words, if the depositors can rely on being able to exchange their deposits into banknotes or into deposits at another bank at any time without any problems. For this to be ensured in turbulent times as well, banks need to have a strong capital base and sufficient liquidity. They must be able to meet their obligations at all times, and therefore must not take on any excessive risks. This is the case if banks structure their business 7 8  For more information on Swiss monetary history, cf. inter alia Jordan, Thomas J. (2014), Sound money – a fundamental pillar of our society, speech at Ustertag, Uster, 23 November. Of course, this temptation is not unique to paper money systems, as shown by recurrent instances of debasement in the era of metal-based money. Non-state money issuers are also susceptible, albeit with the motive of private gains.

5  All speeches are available online at www.bankofengland.co.uk/news/speeches  5  But of course innovation won’t be sustained if it’s unsafe or detrimental for financial stability. Clear, transparent regulatory expectations are critical to ensure that uncertain rules of the game don’t hold innovation back. This poses several challenges for regulators – I’m going to focus on the two that are most important for financial stability. We need payments to be secure and reliable. Problem 1 for central banks is that robust and reliable ways to pay are essential to financial stability. Well-functioning and resilient payment chains allow payments to be made on time, with confidence, even in periods of economic uncertainty. Think – receipt of your salary, benefits and pensions, direct debit bill payments ability to tap and ride the tube home or leave the restaurant after a meal. The reliability and resilience of payments is so important to our economy that the UK Financial Policy Committee, tasked with identifying, monitoring and reducing systemic risks, lists avoiding serious interruptions in the provision of payment and settlement services as one of the very purposes of preserving financial stability. If a stablecoin were to significantly replace current systemic payments chains as a way to pay – logic follows that they would pose the same risks to the economy as current payments chains and should be regulated to the same standards. This is relatively straightforward: regulation should be technology neutral: based on the activity conducted and the risks posed, not the technology used or the entity’s legal form.
The Yellen camp’s view is that the Phillips curve looks largely as it normally does or, at any rate, has changed so little that it still works as an effective channel through which central banks can influence inflation. According to the Borio camp, the Phillips curve has instead almost broken down or, at any rate, changed so  9 [20]  much that it no longer forms a central part of the inflation process. More specifically, high resource utilisation no longer results in higher inflation, according to this view. Instead, it is claimed, inflation is highly influenced by structural factors. Factors often emphasised as exerting downward pressure on inflation are globalisation and, looking forward, more and more digitalisation. 14 These are arguments that those who have followed the debate in Sweden in recent years will recognise. According to this view, the central banks will find it difficult to steer inflation for a long time to come. As I mentioned in my introduction, taken to its conclusion, this means that it is pointless to set up targets for inflation, as this is mainly determined by factors outside monetary policy. As I also noted earlier, the Yellen camp does not share this view but believes that inflation targets are meaningful, important and possible to attain. Implications of the Swedish experiences What view, then, should we take of the international debate in light of our experiences here in Sweden? As I see it, our experiences overall are more in line with the Yellen camp's view.

There may be seriously diminishing returns. And at the same time it’s possible that ever more bank capital may not best serve the real economy. It may be prudential. But it may not be macroprudential. We have to be alert to the possibility that more bank capital could hold back growth. The costs of higher levels of capital can be overstated, including – let’s face it – by some bank executives who mistake private costs to today’s shareholders for true economic costs. It’s often forgotten that lower leverage makes equity and debt less risky, driving down the cost of both. That isn’t just a textbook result; it’s supported by the data. But the evidence from numerous studies is that this effect is incomplete. Total funding costs do rise as companies – of all sorts, not just banks – swap debt for equity funding. And this effect goes beyond what can be explained by the differential tax treatment of debt and equity. 4 The drivers of this are unclear. It’s an area where there is much to learn; where partnership between the industry and academia could be productive in bringing theory and practice closer together. 5 In general, it seems that investors’ preferences for different types of assets are affected not just by the risk and return of those assets. Equity investors seem to want higher, more volatile returns. They like their equity to be equity-like. So making it safer doesn’t reduce its cost as much as it should.
As this task is formulated in the Riksbank Act, the objective of the Riksbank’s operations shall be to pursue price stability and to promote a secure and efficient system of payments. The role of fiscal policy should include shaping the tax system so as to create the best conditions for the highest possible potential output. Changes in the Government’s financial savings and the requirement that there should be a surplus in the public finances over the course of a business cycle both work to create greater confidence in economic policy. The orientation of the budget policy, like that of monetary policy, is of great significance for the way the economy develops. If the fundamental rules of the game are stable, the actors in an economy will dare to make long-term decisions. 1  BIS Review 132/1999  Of course, it would also be desirable for monetary policy and fiscal policy to work together in such a way as to moderate major variations in employment and growth, i.e. so as to reduce cyclical fluctuations around potential growth. Since this may be difficult to achieve in practice, one question that arises is what is the optimal mode of interaction for fiscal policy and monetary policy within the framework of the inflation target regime. What happens in an inflation target economy if fiscal policy completely disregards the state of the economy? What happens, e.g. when the economy is in a boom if fiscal policy is conducted along excessively expansive lines?

But on account of communication barriers, Zambian businesses might not take advantage of our close proximity. This goes to show Your Excellency that our reliance on English as a lingua franca is detrimental to our national interest, especially in our quest to alleviate poverty in our society. In this regard, the need for us to speak, read and write French so that we communicate effectively at the regional and international level cannot be overstressed. BIS Review 5/2005  1  Furthermore, recent developments in the global economy dictate that we should be able to interact effectively at various international fora where appreciation of the cultures, values and customs of other people is important. Therefore, in view of the foregoing, we, at the Bank of Zambia, have realised that there is a compelling need to overcome our communication barrier by developing our employees’ multi-lingual skills, particularly, in French so as to, among other things: (i)  develop the required patience in their interactions with our non-English speaking counterparts;  (ii)  acknowledge the unique talents and contributions of others;  (iii)  uncover and show concern for the pressures and constraints which others face and modify the demands we may place on them;  (iv)  actively seek facts and data that explain and support others’ views and incorporate others’ feelings and values when restating their perspectives; and  (v)  reduce the cost of hiring external interpreters which impacts adversely on our limited resources.