samchain/econo-pairs-v1 huggingface dataset:
Monetary policy with a steady hand Speech given by Huw Pill Chief Economist  The Society of Professional Economists Online Conference 2022 The Challenges of Change 9 February 2022  My thanks to Jack Meaning, Alberto Polo, Rich Harrison, for helpful discussions in the preparation of this speech. I would also like to thank Andrew Bailey, Lennart Brandt, Ben Broadbent, Alan Castle, Michael Goldby, Jonathan Haskel, Andrew Hauser, Michael Saunders, Martin Seneca, Fergal Shortall, Tom Smith, Matthew Swannell and Silvana Tenreyro for their comments. Opinions (and all remaining errors and omissions) are my own. 1  All speeches are available online at www.bankofengland.co.uk/news/speeches  Good afternoon everyone. It is a great pleasure and honour to speak at today’s Society of Professional Economists conference. Thanks to George Buckley and his fellow organisers for the invitation to participate. Last week’s MPC decision Let me start with last week’s MPC decision. As you all know, the MPC decided to raise Bank Rate by 25bp to 0.5%. The Committee also agreed to commence the unwind of gilt holdings accumulated through quantitative easing (by ending re-investment of maturing bonds), as well as announce an intended unwind of the corporate bond portfolio.1  This further withdrawal of the monetary policy accommodation introduced at the outset of the pandemic was motivated by a forecast with three important and inter-related elements, which I will address in turn. First, the evolution of international energy and goods prices, which continue to drive headline inflation developments in the UK.

Looking ahead, we recognised that we needed two more measures: to require participants to use a common platform and to adopt common standards (such as SGQR). C. GOING CROSS BORDER 4/6  BIS central bankers' speeches  As we aim for interoperability and efficiency within our domestic systems, it is equally important to look beyond and to look outwards. A lot of commerce and e-commerce 19.  is carried out across borders today: Cross border e-commerce alone is expected to expand strongly, by approximately 25% annually until 2020, nearly twice the growth rate of domestic ecommerce10. And just as more people travel and work overseas, and more businesses find ways to deliver goods and services overseas, payments will also need to keep up. Among Singapore’s list of priorities as ASEAN Chair this year is to promote the growth of e-commerce in the region. Google and Temasek estimated that e-commerce in 20. ASEAN could amount to USD 88 billion in 202511. Cross border payments that are affordable, secure, and instant, will play an important role in driving e-commerce trade flows and achieving this vision. Although cross-border linkages offer huge benefits in important areas of the economy such as trade and tourism, implementing them is an up-hill task because of 21.  complexities like different technical interfaces, and legal and regulatory requirements in each jurisdiction. Each country is also in a varying stages of development. But we are making progress: a.
The results and any consequences that flow from them will be announced later this year. The second objective is to reduce the risk of excessive indebtedness itself by taking out insurance. Given recent experience, few can now believe that the right policy is to wait to mop  for-one with income, supply constraints are likely to put increasing pressure on prices in a now rapidly-growing economy. 6  That is high relative to other advanced economies. Household debt stands at between 105% and 115% of disposable income across the Euro-area, US and Japan (IMF, 2014). 7  By latest estimates, around 40% of new mortgages were at LTIs of at least 3.5x. 25% at were at LTIs of at least 4x. 10% were at LTIs of at least 4.5x. BIS central bankers’ speeches  5  up the consequences of debt-driven busts after they crystallise. That is even more obvious when Bank Rate is at its effective lower bound. In other words, when you hear the thunder of the falls, it is wise to get off the river. Measures to take out insurance can be graduated and proportionate if action is taken sufficiently early. We can limit risks tomorrow by acting against a loosening in underwriting standards in new mortgage lending today. The value of acting early is reinforced by uncertainty around the precise impact of macroprudential tools.

The expenditure ceiling for central government finances that sets limits for how much public activity can expand has the same effect. Many structural reforms that have improved the conditions for growth in the longer term have also been carried out during the past decades. The financial markets are wholly deregulated and the tax system is reformed so that it produces fewer distortions than before. During the 1990s, a process has been initiated which has strengthened competition in many areas. Transport, communication and energy have been deregulated. At the same time, EU membership and continued internationalisation have exposed the business sector to increased competition. However, there is still a great potential for deregulation. This applies, for instance, to many parts of service production where moreover growth prospects look favourable. A study recently carried out by the Competition Authority confirms that competition has improved during the 1990s, but also points to considerable competition deficiencies in many industries. Besides many industries in the service sector, this also applies, among others, to the construction industry where regulatory frameworks and building norms contribute to excluding competitors from other countries. The study is a follow-up of a study carried out in 1991. Its conclusion was that lack of competition and concomitant high prices was a feature of a number of the industries investigated.
Changing market structure Let me highlight a few of the changes in the financial structure that are germane to the mandate of the Federal Reserve. They are: •  The greater systemic importance of a smaller number of large bank-centered financial institutions;  •  The greater role played by non-bank financial institutions;  •  The growth of the GSEs;  •  Greater operational demands on the core of the clearing and settlement structure;  •  An increase in the complexity of risk management and compliance challenges; and  •  The extent of global financial integration. These are not all that new, and not all are unique to the United States, but taken together they are significant. Most conspicuously, we have seen the emergence of a small number of very large, complex, bankcentered financial institutions that now account for a substantial share of the assets and liabilities of the U.S. banking system. The top five domestic bank holding companies now hold about 45 percent of banking assets, almost twice the share as they did 20 years ago. BIS Review 55/2004  1  The earnings capacity of these very large banking institutions, the absolute size of their capital cushions, and the diversity of their activities, geographic and functional, should make them less vulnerable to specific shocks and better able to absorb larger shocks than has been true in the past.

Let me start with a brief remark about terminology. For a long time, economic thinkers used the term “political economy” to refer to the discipline that we now call “economics”. Adam Smith, David Ricardo or Léon Walras, to name but a few, were some of its exponents. Despite its 400 year-old history, the term “political economy” had in the last decades gradually lost its importance as a comprehensive way of understanding economic issues. And yet it could now be returning to the forefront, given the strong interactions between politics and economics. At the international level, we cannot yet predict what Mr. Trump’s presidency will really be like, but we can expect a deep political shift, with consequences for American economic policies. Besides, the electoral cycle will continue in Europe, starting with the Italian referendum in December. To state the obvious, the first certainty is that we are facing a lot of uncertainty. How will Europe overcome this? I sincerely hope not by “waiting and seeing”, but rather by sticking to and building further on its three shared economic and social assets: its single currency, its single market, and its unique social model. We must actively build on them, and not lazily rest on our laurels: pride should not be confused with complacency. First, with the euro, we share a solid currency which is recognised worldwide. The vast majority of euro area citizens are attached to it (68% according to the latest Eurobarometeri). Moreover, in a world of uncertainty, European monetary policy is a yardstick of stability.
Economic activity relied on the public sector and external demand, although more moderately than in the first quarter of the year. In the meantime, the private sector demand appears sluggish, also conditioning our projections for economic growth for the rest of the year.   Private investments continue to be slow, compared with their historical rates and the country’s needs for quantitative and qualitative production capacities. This  BIS central bankers’ speeches  1  The expected easing of funding terms during the second half of the year as well as the decline of perceived uncertainty by businesses and individuals are expected to be accompanied by the somewhat more positive performance of private consumption and investments in this period.   Stimulating nature of fiscal policy during the first half of the year is reflected in a positive contribution of public expenditures to economic growth. For the first seven months of the year, public spending increased by 5.9% in annual terms. Moreover, performance of fiscal revenues was slow, reflected in their annual growth of 2.3% during this period. This behaviour of income and expenditures is materialised in a higher budget deficit than a year earlier. Fiscal impulse to the economy was consistent throughout this period. It showed tendencies of moderation during the second quarter, which are expected to strengthen further during the rest of the year, in conformity with the revised budget of 2011.   Contribution of foreign demand to economic growth was lower during the second quarter of the year.

Trade deficit in the second quarter was 20% higher compared to a year earlier. Our exports shrank by about 2.8% year-on-year for this period, a reflection of reduced exporting of energy, which is a volatile component in exports. Despite this development, the core basis of exports continues to maintain more sustainable growth rates. On the other hand, imports continued their annual growth, albeit at a lower rate compared to the first quarter of the year. Aggregate demand performance triggered economic activity growth but was inadequate to fully utilise Albania’s output capacities. Developments in the labour market seem sluggish and do not have premises for emergence of stable inflationary pressures. Signals from economic information are confirmed also by the monetary indicator analysis. In June, annual growth of M3 aggregate was 11.8%, around average rates of the past 12 months. Our assessments show that the expansion of monetary supply is in line with the performance of the economy’s demand for monetary assets. In June and throughout the second quarter, the public sector demand for funding was high, in line with the intensity of the fiscal activity during that period of the year. Furthermore, the private sector demand for funding continued to be moderate. Lending to private sector posted annual growth of 11.6% in June, in line with the second quarter’s performance. Financial markets are characterised by a serene environment with contained risk premia. Interbank market experienced increased trade volume; interest rates were close to the key rate and had low volatility.
1 2  72.9 per cent in March – against a 30-year average of 80.2 per cent 1972-2003. Private defined-benefit pension schemes are estimated at approximately 3 per cent of GDP. Estimate by the Pension Benefit Guaranty Corporation, referred to in The Economist, May 2003. 2  BIS Review 23/2003  As mentioned earlier, the driving forces behind the Norwegian business cycle have differed from those in other countries. In Norway, the business cycle has followed a course more similar to previous fluctuations, with a sharp rise in household demand, labour shortages and strong wage growth. Measured in a common currency, labour costs for Norwegian industrial workers have increased by a total of 19 per cent more than was the case for our trading partners in the period 1996-2002 (13 per cent due to wage growth and 6 per cent due to the appreciation of the krone). In the years around the millennium, the depreciation of the krone veiled the underlying deterioration in competitiveness. In May 2000, the krone exchange rate reached its lowest level in six years. In the subsequent period up to end-2002, the krone appreciated, and the effects of high wage growth have gradually come into evidence in company accounts. High labour costs measured in a common currency have weakened profitability in the business sector. This is the reason for the current cost cuts, the decline in employment and the increase in unemployment.

A similar view emerges from the talks conducted every quarter with over 200 companies by the SNB’s delegates for regional economic relations. Inflation expectations are thus within the range that is consistent with the SNB’s definition of price stability. Like inflation expectations, short and long-term interest rates in Switzerland have hardly changed since summer. Short-term money market rates have remained close to –0.75%, and the yield on ten-year Confederation bonds has fluctuated between 0% and –0.2%. The interest rate differential with the euro area has been largely stable. By contrast, the interest rate differential with the US has widened somewhat, due to higher US interest rates resulting from tighter monetary policy. There has, however, been movement since June with respect to exchange rates. Over the past six months, the Swiss franc has depreciated against the euro by about 7%. In addition, since the last monetary policy assessment in September, a mild weakening has occurred against the US dollar. The trade-weighted nominal exchange rate for the Swiss franc is currently about 5% lower than in June. The depreciation in real terms is roughly similar. The weakening of the Swiss franc has contributed to reducing the overvaluation. However, the franc is still highly valued. What lies behind these exchange rate movements? In the first phase, from June to September, the Swiss franc depreciated against the euro, while remaining largely stable against the US Page 3/4  Berne, 14 December 2017 Thomas Jordan  News conference  dollar.
But, above all, it has been a key tool for ensuring the maintenance of affected employees’ income and for improving the prospects of recouping employment once the restrictions on activity imposed by the state of alert are lifted. The particular characteristics of this shock, which temporarily shut down many workplaces, and the incentives approved for the use of this instrument after the state of alert was declared have contributed to a much greater resort to ERTEs than in past crises. Hence, if we focus on the arrangements available for permanent employees, at end-April the number of workers affected by an ERTE totalled 3.4 million. Since then, this figure has fallen significantly. Moreover, on the information available, only a very small portion of wageearners who have emerged from this situation have gone into unemployment or become idle, whereas most of those affected have returned to their pre-crisis job. These developments are qualitatively consistent with the objective pursued; namely, that ERTEs would be a temporarily used tool while the transitory shutdown in activity lasted. In late June, coinciding with the end of lockdown-easing, 1.8 million workers continued to avail themselves of an ERTE. This figure is almost half the end-April peak and accounts for close to 10% of total wage-earners, confirming that one of the characteristics of this recovery is its incompleteness. From the standpoint of the labour market, what we have is also an uneven recovery. This is because the reduction in the number of workers on ERTEs has been very uneven across the productive sectors.

In particular, along with the adverse impact that the social distancing measures we may have to maintain in the future may exert on activity, there is a further effect. This is more difficult to measure a priori and relates to the possible and potentially persistent changes in agents’ behaviour in response to the “new normal”. These changes might include modified patterns of consumption and saving, or changes in supply chains or in certain aspects of firms’ operations. All these considerations would warrant qualifying the current recovery as uncertain, to take the second of the adjectives I used earlier to characterise this recovery. Additionally, from the standpoint of the sectors of activity, not all of them suffered on a comparable scale the consequences of the pandemic lockdown measures, as they are not equally susceptible to the imposition of social distancing measures. And the gradual startup in activity is not taking place at the same pace in the different sectors. The earlier normalisation of manufacturing and of certain services coexists alongside a slower than usual recovery in levels of activity in those other services, such as leisure and hospitality, where personal interaction is greater. Here, full normalisation is not likely to be attained until we have an effective medical solution. These differences in the pace at which normal levels of activity in productive sectors are being restored allows us to characterise this recovery as uneven, taking the last of my three adjectives.
But in practice we tend to say that there are prices that are beyond the control of monetary policy, that are somehow disconnected from the conduct of monetary policy, or that are “completely different”. Real estate prices, asset prices etc. Interesting, isn’t it? And conversely, in practice we know what financial instability looks like and what it is. But in theory we haven’t created a rigorous operationalised theoretical system for achieving financial stability, or even for defining financial stability. There is no single, universally accepted definition of financial stability, as quantifiable as the definition of price stability. And what is worse, many believe there will never be one. Again, quite interesting. So this, in my eyes, is the first constraint we face. At least in the area of financial stability, theory lags behind practice. Inflation targeting is a formalised, practical and handy system, while “financial stability targeting” is not, despite huge steps forward recently. And I can’t resist dreaming of a day when we have a system in the financial stability area that is as operationalised as inflation targeting. After all, back in 1978, the U.S. economic historian Charles Kindleberger, in his now classic book “Manias, Panics, and Crashes: A History of Financial Crises”, pointed out that financial upheavals had virtually always been preceded by credit booms, property price and asset price booms and increased leverage in the financial system. All these are, in a sense, monetary phenomena. So why couldn’t we go further here as well?

The aim of system oversight is to ensure that the high levels of safety and efficiency which characterise the market infrastructure of the Swiss financial centre are safeguarded for the future. Emergency liquidity assistance: a means of overcoming crises The National Bank is not only active in prevention - i.e. in the macroprudential oversight of the banking sector and in the oversight of the payment and securities settlement systems (system oversight) - but also contributes actively to overcoming crises. In a crisis, the National Bank - like any other central bank - is primarily responsible for maintaining liquidity. On the one hand, it can do this by ensuring that the market is amply supplied with liquidity. And on the other hand, as lender of last resort (LOLR) it can also provide emergency liquidity assistance to individual banks that are illiquid but still solvent. Here too we adopt internationally accepted procedures. Many central banks still prefer not to inform the commercial banks in too much detail about their role as LOLR. Quite understandably, they want to prevent the banks from being lulled into a false sense of security. The jargon term for this is “constructive ambiguity”. By contrast, the Swiss National Bank has opted - after carefully weighing up the moral hazard implications of its conduct - to communicate its terms to the banks both clearly and well in advance. The modalities are described in the Guidelines of  2  BIS Review 39/2004  the Swiss National Bank on Monetary Policy Instruments of 30 April 2004.
And even if it is possible to model credit risk for, say, a bank’s mortgage book, it is much more difficult to model the complex and often obscure relationships between parts of the financial sector – the interconnectedness – that give rise to risk in periods of stress. Moreover, allowing banks to use their own models to calculate the riskiness of their portfolio for regulatory capital requirements opens the door to the risk of gaming. Deliberately or otherwise, banks opt for less conservative modelling assumptions that lead to less onerous capital requirements. Though the supervisory model review process provides some protection against this risk, in practice, it can be difficult to keep track of what can amount to, for a large international bank, thousands of internal risk models. The underlying principle of the Basel 3 risk-weighted capital standards – that a bank’s capital should take account of the riskiness of its assets – remains valid. But it is not enough. Concerns about the vulnerability of risk-weights to “model risk” call for an alternative, simpler lens for measuring bank capital adequacy – one that is not reliant on large numbers of models. This is the rationale behind the so-called “leverage ratio” – a simple unweighted ratio of bank’s equity to a measure of their total un-risk-weighted exposures. By itself, of course, such a measure would mean banks’ capital was insensitive to risk. For any given level of capital, it would encourage banks to load up on risky assets.

As a result, dealers were, it is true, able to carry high levels of inventory and to accommodate easily shifts in the demand for market-making. But they were also vulnerable to falls in asset prices and tightening in wholesale markets conditions. When faced with severe stress, they were forced to withdraw from market-making altogether. In short, when conditions became really testing, market liquidity, like bank capital, proved to be an illusion. With regulation tighter, it may well be harder for market-makers to absorb inventory when end investors wish to off-load assets; market liquidity may start to fall away at an earlier point. The risk of another complete failure of market liquidity should be much reduced. But market participants will not always be able to sell what they want, where they want and when they want. BIS central bankers’ speeches  5  Investors need to recognize this change in market structure and adjust accordingly. In this respect it is perhaps worth observing that it is currently quite puzzling that, when market participants seem to be worried about market liquidity and the impact of regulation on market making, liquidity risk premia seem to be so compressed. It does raise questions over whether liquidity risks have been properly priced. Central bankers are, of course, supposed to worry about new risks. But I would not want to leave you with the impression that nothing has improved in the financial stability world.