jon cunliffe : monetary policy one year on speech by sir jon cunliffe, deputy governor for financial stability of the bank of england, to the cambridge society for economic pluralism, cambridge, 28 october 2014. * * * my appointment to the bank of england was announced in july 2013, at about the same time we first had official data in showing the uk economy growing strongly. i joined almost exactly a year ago on 1 november, shortly before the inflation data for october came in showing a 0. 5pp drop to 2. 2 %, the biggest fall in over 18 months. but as always in economic policy making one has to distinguish between correlation and causality. the latter is nearly always uncertain. indeed, as an economic policy maker, especially a forward looking monetary policy maker, one must accept one is almost always making policy under conditions of considerable uncertainty. perhaps that is why you so often hear from monetary policy makers about puzzles and how “ the data are unusually difficult to read this month ”. our job on the mpc is precisely to make judgments about the future on the basis of imperfect information. to decide when we have enough to act and when it is better to wait. and to adapt those judgments as the economy evolves. against that background, and on the occasion of my first anniversary at the bank, i want tonight to review how the economy has evolved over the last year against what was expected when i joined the mpc. and to look at the judgments and uncertainties we now face. needless to say, as always, the “ data are difficult to read ”. when i arrived on the mpc, we were seeing signs of a strong recovery – stronger than anyone had forecast – that had started in the spring of 2013. over the middle 2 quarters of that year, gdp had increased at an annualised rate of over 3 %. the key drivers of the recovery seemed to be renewed consumer and business confidence due in no small part to the de - escalation of the euro crisis and an easing in credit conditions. these in turn released pent up demand in the economy. the evidence suggested that this strong growth would continue into 2014. forward looking economic indicators were very strong. the business surveys were pointing to continued growth at that pace. the squeeze in living standards from higher energy and food prices had started to ease. but, growth seemed to be almost entirely driven by consumer spending and the emerging recovery in the housing market. that strength in consumer spending

. access to central bank money or asset swaps should, as far as possible, encourage banks to manage liquidity risk prudently. without the correct pricing structure, the incentives to encourage future risk taking are obvious and potentially large. valuation margins – or haircuts – are used to protect our balance sheet. by themselves, they aren ’ t sufficient to create a general pricing structure. the cost imposed by a margin depends primarily on the difference between the costs of secured and unsecured funding, and that will vary across banks and over time. so the key is in the interest rates charged by the central bank. the second challenge is to overcome the ‘ stigma ’ problem that has plagued the use of central bank facilities throughout the crisis. commercial banks have feared that, by accessing funding from the central bank, they would acquire a ‘ black spot ’ in the market. they have been reluctant to come to their central bank unless in good and extensive company. these are challenges that all major central banks are grappling with. they will not be easy to overcome. but with our international colleagues we are aiming to devise a framework that does so. the prize will be an integrated framework, covering all our lending to the banking system and one that i hope, by making clear the terms on which liquidity will be provided in times of stress, will focus the minds of banks long before those stresses emerge. during my second term as governor i would like to see us establish a framework for financial stability that is on as sound a footing as the one we have successfully established for monetary stability. the measures i have described would go a considerable way to achieving that. but just as no framework for monetary policy can prevent shocks from hitting the uk economy, we need to think carefully about why financial crises have been both persistent and damaging. that leads me to one final thought on which i want to end. for reasons of historical accident we have created over many decades a financial system in which the incentives to monitor risk - taking have been sharply reduced. it is often said that the role of a central bank is to take the punch bowl away just as the party is getting going. that approach has served us well in monetary policy. but all those efforts will come to naught if the opposite applies to the financial sector. if banks feel they must keep on dancing while the music is playing and that at the end of the party the central bank will make sure everyone gets home safely, then over time the parties will become