be at the heart of the quarterly forecast round on which the mpc is just embarking. and it could hardly matter more. anaemic demand growth would lead to inflation undershooting the target for a period. and it would be likely to see firms continuing to shed labour, scrapping capital and delaying new investment, adding to the hardships the crisis has already brought. but i fear, however, that we may not be much clearer about the general trends in demand until at least late spring / early summer next year. there are major uncertainties about global demand and about domestic saving given the need for many households to strengthen their balance see tucker pmwt ( 2009c ), “ the state of the markets : four issues ”, at the association of british insurers biennial conference, london. for my thoughts on the idea of ‘ insurance ’ or ‘ precautionary ’ monetary policy settings, see tucker pmwt ( 2006b ), “ reflections on operating inflation targeting ”, a speech at the graduate school of business, university of chicago, may 2006, ( pp. 10 - 12 ). sheets over time. and, in particular, i doubt it will be clear before then whether or not the financial system is sufficiently recovered to support what may well prove to be a more creditintensive phase of cyclical recovery. the continuing uncertainties about credit supply underline just how much an effectively functioning financial system matters to the real economy. that much has been demonstrated beyond doubt by the massive measures taken here and elsewhere to prop the system up when the vortex beckoned. those measures have rightly drawn attention to what for too long was a neglected issue : too big to fail – or, as we have also discovered, too interconnected, too complex to be allowed to fail in the way of an ordinary business. like all truly big policy questions, this is a partly social question. it just cannot be acceptable that the downside from excessive risk across the financial system as a whole falls to the general taxpayer, to households and firms throughout the economy, if the upside is enjoyed by a narrower group of shareholders and managers. this is not just an issue of economic efficiency – of the allocation of resources – and of leaning against the risk of even bigger crises down the road, but also of social justice. that is why the debate has attracted so much interest. but i hope i can persuade you that the too big to fail problem matters to bankers too. because the lehman case demonstrates that

( chart 9 ). the weight of money – pension funds and sovereign wealth funds a second development in financial markets in the news at present is the growth of sovereign investors and of “ sovereign wealth funds ” in particular. while these have long been established in singapore, norway and the middle east, the decision of china with its huge foreign exchange reserves to diversify its investments is new. the question is what effect, if any, the growth of influential investors like these is having and may have in future on relative prices in financial markets. economists tend to assume that asset markets are efficient so that any deviation from fundamental value represents a profit opportunity that will be quickly eliminated through the actions of rational traders who are constantly on the lookout for such opportunities. underpriced assets are bought while overpriced assets are sold short, thereby bringing prices back in line with their fundamental value. in this way, investment flows and trading activity should not impact prices, unless they reflect information about the fundamentals. in practice the position can be more complicated. in the uk, demand for long - term gilts from pension funds is widely thought to have had a significant impact especially on indexed gilt prices. trustees have become more concerned in recent years to reduce the volatility of funds ’ valuations, since changes now appear on the sponsoring companies ’ balance sheets. there has been a wide move towards liability driven investment ( ldi ) and to matching their long term liabilities either by buying more index - linked bonds or by buying equivalent hedges in the derivative markets. the narrowing of pension fund deficits as equity markets have improved may have strengthened the trend since funds may now want to “ lock in ” the improved position. even a relatively small shift in pension funds ’ strategies would represent a large increase in demand relative to the size of the inflation - linked bond market. during 2005 and 2006, anecdotal evidence suggested that uk pension demand for gilts ( and associated hedging by dealers ) was a contributory factor in driving long - horizon sterling nominal and real interest rates lower. indeed, this may have been one reason why uk long - term real interest rates fell by more over this period than overseas rates. assessing the impact on gilts prices is important for the bank because we commonly use the differences between indexed and conventional gilts to estimate longer term market inflation expectations. and these calculations have shown an increase in forward inflation breakevens especially in the last few months as nominal long term rates have increased ( chart