sector has tended to follow on from defaults and losses on domestic loans as interest rates rise and the economy slows down. but this time the downturn started in the banking sector – last summer when losses in the us property market not only led to losses in uk banks trading and treasury books but closed important sources of finance to them. the downturn in the housing market and then the wider economy followed. domestic default rates, while beginning to rise, are still low by historical standards, despite the fact that we are more than a year into the crisis. those differences reflect the most important distinguishing feature of this downturn, namely its roots in global imbalances not just in trade but in the financial system. the growth and savings in emerging economies led to an extraordinary flow of funds back to the developed world and to the us in particular. that in turn kept interest rates low, allowing the rapid growth of credit and fuelling a sharp rise in asset prices and an increasingly risky search for yield – for example in sub prime housing in the us. the impact in the uk was different but no less marked. here too the low cost of credit fuelled a spectacular expansion of bank balance sheets ( chart 3 ) and with it a growth in leverage ( chart 4 ). and, as chart 5 shows, while savings rates fell in the uk, limiting the growth of retail deposits, banks financed that lending by tapping wholesale markets. the gap between customer lending and deposits moved from zero at the turn of the century to over £700 billion in 2008 h1. much of that funding was ultimately sourced overseas. in particular, the united states acted as an intermediary, attracting capital inflows from the rest of the world and exporting these funds to other countries. road shows to investors in the us and europe ceased to be the preserve of the international giants and became common among smaller players whose whole asset base was in the uk. as the difficulties in the financial system have persisted and worsened, it has become clear that these developments have created real structural weaknesses in the banking sector. in particular : • inflated aggregate balance sheets, whose expansion had outpaced growth in the real economy ; • expansion into assets whose underlying value, credit quality and liquidity were uncertain ; • liability structures which were overly reliant on sustained availability of wholesale funding whose maturity was often short ; • capital and liquidity buffers which became too low, given these asset and liability risks ; and • underappreciated,

bank of england back to the future − speech by dave ramsden given at the society of professional economists annual conference, hosted by bloomberg 17 november 2023 bank of england speech thank you for the invitation to speak today, which gives me a chance to continue my support for the society of professional economists, beyond my very limited official duties for the society. thank you also to bloomberg for their support for the spe, through hosting today ’ s conference on future - proofing the world economy. in going back to the future, i ’ m going to review uk economic developments over the last twelve months, compared with the forecasts the monetary policy committee ( mpc ) has produced over that period. i ’ ll then set out how my thinking on the role played by the forecasts has evolved in the context of the november monetary policy report ( mpr ) forecasts published a fortnight ago. i will finish with some personal reflections on the implications of the outlook for monetary policy and why the best thing the mpc can contribute to future - proofing the uk economy is to get inflation back to the 2 per cent target sustainably in the medium term. this speech is a sequel of sorts to one i gave a year ago1. then my focus was on the uncertainty created by the major shocks the uk economy had experienced. uncertainty remains heightened both from the ongoing consequences of these earlier shocks, including what they imply about the future balance of demand and supply in the economy and the persistence of inflationary pressures. the last year has also seen its fair share of shocks, for example stresses in the banking system, but while these have impacted on parts of the financial system their wider macroeconomic implications have so far been limited. those more recent shocks could still have more significant implications. but as of now i feel more confident than i did a year ago about looking beyond the next few months to the economic and policy outlook further out. to frame my comments on economic developments, table 1 compares the forecasts from the november 2022 and november 2023 mprs2. 1 see speech given by dave ramsden at bank of england watchers ’ conference, on thursday 24 november 2022. 2 see annex 2 monetary policy report - august 2023 | bank of england for a similar comparison between the february 2022 forecast and subsequent outturns and forecasts. bank of england table 1 : 2022 q4 outturns and november 2023 and november 2022 mpr forecasts notes : shaded columns refer to forecast