in the real economy in a number of ways. for example, when real interest rates decline, people will shift their portfolios from cash, deposits, and fixed - income securities to equities and tangible assets such as land and housing, or to foreign currency - denominated assets with higher returns. the rise in equity prices and the appreciation of foreign currencies will stimulate private consumption through the wealth effect ( charts 8 and 9 ). in addition to the decline in expected real interest rates, other factors – including an increase in consumption and an improvement in export conditions due to the depreciation of the yen – will encourage firms to be more aggressive in their business fixed investment ( chart 10 ). a shortage of aggregate demand within the economy as a whole will be eliminated through an increase in demand such as private consumption and investment, and thus price levels will naturally rise. this will further raise inflation expectations toward the price stability target ; hence, a virtuous cycle prevails. those who are skeptical of the bank ’ s ability to achieve the price stability target often say that the 2 percent target cannot easily be achieved unless there is further depreciation of the yen. nonetheless, as i just explained, the main driver in the qqe ’ s transmission mechanism is to generate the virtuous cycle by raising inflation expectations and improving the output gap. by no means is it intended to rely on a rise in import prices backed by the yen ’ s depreciation. if the rise in the cpi since the beginning of the qqe last april stems from the cost - push inflation triggered by the rise in import prices on the back of the weaker yen, then the real gdp should have declined and an unemployment rate should have risen. we should have been in stagflation by now. looking at the economy, the real gdp growth rate was negative for two consecutive quarters ( – 0. 6 percent and – 0. 8 percent in the second and third quarter of 2012, respectively ) shortly before abenomics was announced. since the fourth quarter of 2012, however, it has registered positive growth for six quarters in a row. thus, the real gdp growth has marked a big jump from 0. 7 percent in fiscal 2012 to 2. 3 percent in fiscal 2013. as for the unemployment rate, it has come down to 3. 6 percent in march 2014 from 4. 1 percent in march 2013, shortly before the introduction of the qqe. the unemployment rate of 3

andrew bailey : the outlook for financial regulation in the uk speech by mr andrew bailey, executive director for banking services and chief cashier of the bank of england, on a regional visit to edinburgh, edinburgh, 10 january 2011. * * * andrew bailey will become the deputy chief executive of the prudential regulation authority ( pra ) on its creation. thank you to linda urquart for inviting me to speak today and morton fraser for allowing us to use your venue. i would also like to thank will dowson, the bank ’ s agent for scotland for the assistance that he has given me, and for the work that he does to ensure that the bank is well connected to the uk ’ s most important financial centre after london. will worked for me when he first joined the bank as a graduate entrant, and i can assure you, drawing on that experience, will is an excellent person to ensure that the bank and you as our contacts in scotland are well informed and understand the relevant developments that affect each of us, and of course that we in the bank understand the state of the economy in scotland and the financial sector here. it is quite right that first and foremost our agents support the needs of monetary policy and the mpc. the information that they gather from you, their contacts, makes a real difference to the monetary policy process. there is a parallel in our responsibilities for ensuring financial stability. in an important financial centre like edinburgh, we need to be well connected, and to understand your assessment of the threats to financial stability and we need to explain what we are doing to tackle these threats. our market intelligence function under my colleague paul fisher plays an important role here, and is in frequent contact with the scottish financial community. this contact will be even more important under the new arrangements in which the bank will be responsible for macroprudential policy and its focus on the stability of the financial system, with a new policy making body, the financial policy committee, or fpc. alongside and feeding into the bank ’ s macroprudential role will be our new responsibility for microprudential supervision of deposit takers, insurers and major securities dealers, also in a new body, the prudential regulation authority, or pra. it is therefore a period of major change at the bank, and we are taking very seriously our role in building a system of regulation in the uk that must meet the very reasonable expectations of the public for a safer and sounder financial