that a number of firms must have made substantial losses on the positions they had, there have not been many visible signs of severe financial distress. for most longer - term investors the stress has been seen as rather limited. credit spreads have not particularly blown out with rising “ risk - free ” rates. for example, yields on italian and spanish bonds were remarkably stable for most of this period ; advanced economy equity prices largely recovered ; and “ cov - lite ” loans have continued to be issued at a record pace. overall the system seems to have survived in reasonable shape and for many market participants the “ shock ” is seen as a healthy correction to what had become a complacent outlook. as reported in the record of the recent fpc meeting published yesterday, staff from the fca, pra and bank have carried out some analysis of the sensitivity of borrowers and financial institutions to upward movements in long - term interest rates and credit spreads. 3 that preliminary work suggested that “ a moderate rise in long - term interest rates did not pose an immediate threat to major banks and insurance companies. but borrowers would become more exposed to an increase in interest rates were debt levels to rise. and counterparty classes with higher leverage or exposures to market liquidity risk or credit spreads were more affected... ”. the committee did not draw too much comfort from this assessment and has asked that more detailed work be done to assess the risks. what have we learned from this episode? i will pick out a few of the highlights for discussion. first let me note that the “ stress ” so far has not involved any actual exit from accommodative policies in the advanced economies. the change in the outlook was initiated by speculation about the possibility that the fomc might start to slightly reduce the rate at which it is adding stimulus! it would have been a more severe stress if policy rates had actually been changed. many firms for whom maturity transformation is a major part of their business model will actually be better off if the short - term rates at which they fund themselves are relatively unchanged while longer - term rates rise. have markets got it wrong? if so then in my view that was not obviously in the price reactions since may ( although the extent of the fixed - income sell - off may turn out to have been overdone, especially for the uk ) – rather it was the expectations that had become embedded prior to may which had become overly certain even if, at that time, it

( 2010 ) finds evidence of significant spillovers from the federal reserve ’ s lsaps to other advanced economy sovereign bond markets, with yields falling on average by around half the associated fall in us 10 - year yields, while moore, nam, suh and tepper ( 2013 ) find that emerging economy government bond yields fell by around a sixth. monetary policy trade - offs and forward guidance, bank of england, august 2013 ( http : / / www. bankofengland. co. uk / publications / documents / inflationreport / 2013 / ir13augforwardguidance. pdf ) bis central bankers ’ speeches in case that ’ s not sufficiently simple, let me put it the other way round : we remain committed to returning cpi inflation to its 2 % target in line with our remit but, in doing so, we will not act in a way which would risk choking off the recovery prematurely, given the potential for a substantial amount of spare capacity in the economy. the technical details of the policy are needed to make this precise so that it can be implemented and monitored : the mpc intends not to raise bank rate from its current level of 0. 5 % at least until the labour force survey headline measure of the unemployment rate has fallen to a threshold of 7 %. the mpc stands ready to undertake further asset purchases while the unemployment rate remains above 7 % if it judges that additional monetary stimulus is warranted but will otherwise maintain the stock of asset purchases and will reinvest the cash flows associated with all maturing gilts held in the asset purchase facility. this guidance linking bank rate and asset sales to the unemployment threshold would cease to hold if any of the following three “ knockouts ” were breached : if, in the mpc ’ s view, it is more likely than not, that cpi inflation 18 to 24 months ahead will be 0. 5 percentage points or more above the 2 % target ; if medium - term inflation expectations no longer remain sufficiently well anchored ; if the financial policy committee ( fpc ) judges that the stance of monetary policy poses a significant threat to financial stability that cannot be contained by the substantial range of mitigating policy actions available to the fpc, the financial conduct authority and the prudential regulation authority in a way consistent with their objectives. explicit forward policy guidance can enhance the effectiveness of monetary stimulus in three ways. first, it provides greater clarity regarding the mpc ’ s view of the appropriate trade - off between the speed