mr. george conveys his reflections on the development of bond market yields over recent years remarks by the governor of the bank of england, mr. e. a. j. george, at the euromoney international bond congress held in london on 25 / 2 / 97. i ’ m honoured to have been invited to open this 3rd euromoney international bond congress. i remember with great pleasure launching your initial congress in october 1994 in the barbican. it is an even greater pleasure now to launch the qeii! that first congress was an ambitious and imaginative venture. but it immediately established itself as a major event in the international financial calendar. i congratulate euromoney on that achievement, and, to judge from the program, on organising an even bigger and better congress on this third occasion. i am delighted to welcome you all here. i remember our debate at that first congress particularly well, mr. chairman. i remember it because i looked up my notes over the weekend! the context then was one in which yields had fallen very sharply, to unusually low levels, almost everywhere during 1993 only to back up just as sharply during 1994. we concluded, i think, that none of us really understood either the earlier strength of the market or its subsequent weakness! but we had a very enjoyable two days of discussion. one concern at the time was that we were facing a global capital shortage, with increasing demand from the emerging, transitioning and developing countries at a time of strengthening economic activity and large government deficits across the industrial world. referring generally in my remarks this morning to 10 year maturities, real yields - measured by our own indexed gilts - had indeed risen in 1994 by ¾ % or more to close to 4 %. but nominal yields had risen by substantially more - by something like 2 % in the major markets - reflecting increased uncertainty no doubt, but clearly also worsening inflationary expectations. in my remarks on that occasion, i ventured to suggest that bond markets might just be exaggerating at least the inflationary risks, by underestimating three factors in particular : first, the commitment of governments and central banks all around the world to disciplined macro - economic policies. secondly, the restraining effect of both the level of real yields and of structural unemployment particularly in europe. and thirdly, the counter - inflationary effect of global competition and technological innovation. now i seem to recollect that this suggestion was met with a degree of scepticism. that

no, at least not beyond a small scale. another way of framing the question is whether we should be indifferent to the balance between central and commercial bank money in respect of retail activity? why would we want to change this balance? other things equal we should surely not want to do so. the reason is that commercial banks use their money to extend credit directly, whereas central banks do not. so, changing the mix would at best complicate the credit system, other things equal. this of course is the essence of fractional reserve banking, as underpinned by the singleness of money. the final step is to ask whether other things really are equal, or whether there are reasons why in the retail space, digital payments need to be done in a newly created central bank digital currency? a priori, i think the answer to this is that commercial bank money – i. e. banks – is the best home for such innovation. but if for some reason innovation in unlikely to happen, then the central banks have to decide whether they are the only game in town. for me, this justifies why we must continue to prepare for retail cbdc. we have not yet seen enough evidence that the innovation will happen in commercial banks. as central banks, we should be thoroughly engaged to encourage, and if necessary, provide such innovation – but there is no good reason to be proprietorial on this. to finish, why might the innovation not happen and thus other things not be equal? 2 / 3 bis - central bankers'speeches for money as a means of payment or exchange to function effectively, it needs two components. the first ( the money ) is the train – the economic claim ( usually on commercial banks ). the second ( the payment system ) is the rails – the infrastructure or technology with which the claim is exchanged. historically, some of these infrastructures and technologies have developed in ways that have stymied incentives to innovate including, on occasion, due to concentrations of market power. it is important that these structural factors not stand in the way of innovation. for commercial bank money to function effectively, it must keep pace with the needs of its users. our work on retail cbdc is considering these trends in the payments landscape closely. absent innovation in commercial bank money, central banks may be left as the only game in town insofar as retail payments innovation is concerned. that is not my preferred outcome, but not one that we should rule out. thank you.