mr. george discusses macro - economic sustainability in the united kingdom speech by the governor of the bank of england, mr. e. a. j. george, at the chemical industries association : business outlook conference dinner in london on 14 / 1 / 98. i am particularly pleased to be associated with your conference theme of sustainability. the central banker ’ s mantra, with which we start our daily prayer meetings, is : “ price stability is a necessary condition for sustainable growth ” and sustainable growth we see as effectively synonymous with the long - term macro - economic prosperity which is what we are, of course, all seeking to achieve. now i suspect the same is true at the micro - economic level - the level of the individual firm. there are certainly differences between your perspective and ours. you, in the chemical industry, for example, know what you are doing! i mean you know precisely what you are doing at least in your production processes - where our business is much less precise - a behavioural rather than an exact science, if it is a science at all. and you are properly concerned with - indeed responsible to shareholders for - the long - term prosperity of your individual businesses. whereas we - much as we would wish to see you all succeed individually - are concerned with stability and sustainable growth, leading to long - term prosperity, in the economy as a whole. even so, i ’ d find it surprising if, at the micro - economic level, you, too, did not also see sustainability and long - term profitability as necessarily complementary objectives rather than conflicting objectives. in any event, i take macro - economic sustainability as the theme for my remarks this evening. many people think that - because the objective of monetary policy is typically nowadays defined by governments in terms of permanently low inflation - that is seen as an end in itself. but in fact, as i say, we see low inflation - effective price stability - not just as an end in itself but rather as a means to the end of sustainable growth and macro - economic prosperity. rising prices - across the board - are essentially a reflection of imbalance between aggregate demand in the economy and its supply - side capacity to meet that demand. there is not much frankly that we can do - directly - to affect the supply - side capacity of the economy. that is a function of its structural characteristics, including the productive abilities of both sides of industry, which can be influenced over time by the whole raft of government policies. monetary policy operates essentially on

as a primer for other fixed - income securities markets. as a market virtually free of credit risk, its yield curve provides a benchmark for the pricing of other fixed - income securities such as corporate bonds. and as i said, there are also benefits for investors : all classes of investors – the institutional investors like the pension funds and the insurance companies ; the fast - rising mutual funds industry ; the corporate sector ; and even retail investors. the secondary market could offer corporate treasurers new opportunities for liquidity management. since secondary market trading will, for the first time, facilitate market pricing of securities, it will allow pension funds and mutual funds to value their fixed income portfolios on an ongoing basis. one would expect that a more accurate assessment of their portfolio will help pension funds better plan their investment strategies. another important advantage is that the secondary market will extend the menu of investment instruments ; no longer will the investor be compelled to hold on to his five - year bond ; rather, the pension fund can sell its five - year bond and invest in bonds of longer or shorter maturities according to interest rate expectations. as regards the retail market, recent initiatives in the primary bond auctions have made investment in government bonds more accessible to the individual investors. you may recall, the last three bond auctions allowed individuals to purchase bonds in amounts as small as $ 1, 000. with the secondary market, the small investor can now approach any government securities intermediary ( gsi ) to buy and sell bonds, at any time, and have confidence in the transparency of the pricing process. our mandate to foster the development of a secondary market in government securities will also include efforts to develop the use of these securities in repurchase agreements ( repos ). the repo market permits borrowing and lending among market participants, including financial institutions and corporates, to take place on a safe and secure basis while reducing both credit risks and transaction costs. the sec is now in the process of devising a set of rules and a standard “ repo ” agreement to underpin the “ repo ” market. let me concede that the promotion of a vibrant secondary market for government securities has proven to be a major challenge for developing and emerging market economies. newly developed secondary markets are usually very thin and illiquid, with few people willing to sell and many willing buyers. there is no doubt that success depends on the active participation of a whole host of stakeholders – the government, the central bank, as well as