mervyn king : monetary policy developments speech by mr mervyn king, governor of the bank of england, at the lord mayor ’ s banquet for bankers and merchants of the city of london at the mansion house, london, 18 june 2008. * * * my lord mayor, mr chancellor, my lords, ministers, aldermen, mr recorder, sheriffs, ladies and gentlemen : can it really be only a year since we last met in this magnificent room? with the financial crisis continuing, i was tempted to deliver last year ’ s speech again. but that would not allow me to welcome the chancellor to his first mansion house dinner as chancellor. after the past – difficult – year, could i say, chancellor, how much we at the bank have appreciated the patience and good humour with which you have handled the “ slings and arrows of outrageous fortune ”. over that year, the west wind of a credit crunch emanating from the united states and the east wind of higher energy and food prices resulting from the strength of asian economies have been stirring up the waters through which our economic ship must pass. these two challenges of rising inflation and falling economic growth have led to a crop of doom - laden predictions best captured by my less well - known addition to the well - known words of robert frost : some say the world will end in fire, some say in ice. but whichever it is it won ’ t be nice. that “ non - inflationary consistently expansionary ” decade, as i described it in 2003, has drawn to a close. yesterday we learnt that inflation in may rose to 3. 3 %. in line with our remit, i sent an open letter to the chancellor. as i said in my letter, inflation is set to increase further over the next few months. oil prices have doubled since the beginning of last year, and, in real terms, are now as high as they were in the 1970s. and further sharp increases in domestic gas and electricity prices are probably on their way. so what should the monetary policy committee do in the face of this rise in inflation? the immediate cause of the current pickup in inflation is increases in food and energy prices relative to other prices. they are caused by the pressure of demand on the supply of food and energy in the world as a whole. part of that pressure may well reflect expansionary monetary policy in the world as a whole. but the rise in commodity prices cannot, by itself, generate sustained inflation in the united kingdom

learned that the ample reserves framework has worked smoothly with a level of reserves at least as large as we saw during summer and into early september. although temporary open market operations are doing the trick for the time being, anticipated increases in non - reserve liabilities would cause reserves to decline in coming months without further actions. based on these considerations, last friday the fomc announced that the fed will be purchasing u. s. treasury bills at least into the second quarter of next year. 7 specifically, the desk announced an initial monthly pace of purchases of $ 60 billion. these permanent purchases will, over time, bring the underlying level of reserves — by which i mean absent temporary open market operations — to a level consistent with the ample reserves framework on a sustained basis. in concert with these purchases, the fomc announced that the desk will continue temporary overnight and term open market operations at least through january of next year. 8 this combination of permanent treasury bill purchases and ongoing temporary open market operations is designed to provide effective control of the federal funds rate over the next several months. i should emphasize that all of these actions are aimed at the implementation of monetary policy and do not in any way represent a change in the stance of monetary policy. the goal is to make sure that the federal funds rate stays within the target range set by the fomc. as we move forward, we will continue to learn about demand for reserves and other federal reserve liabilities and market functioning, and may adjust the specifics of the plan as appropriate. what does all of this mean for sofr? that ’ s a lot on monetary policy, interest rates, reserves, and repos. but before i close, i ’ d like to emphasize an important point about a particularly important repo benchmark rate, and that ’ s the secured overnight financing rate, or sofr. sofr is the reference rate that the alternative reference rates committee ( arrc ) has selected as the preferred replacement for libor. at the same time that we saw turmoil in the repo market, we saw a temporary spike in sofr. as market participants make preparations to transition away from libor, they ’ re understandably watching sofr very closely. there are a few things i ’ d like to highlight with respect to sofr. first, a temporary spike is not surprising, given that sofr reflects rates on real - world transactions. second, the very fact that we saw a spike in sofr is an indication of how representative