six or twelve month horizons. this could, of course, be entirely driven by the expectation that there would be no move in non - inflation report months : in the extreme, if the distribution of surprises in those months is degenerate ( i. e. so that no one expected a change in rate and this was what actually happened ) then the statement that surprises are bigger in inflation report months is no different from the statement that rates are only expected to change in these months. the closer the distribution comes to being degenerate, the more weight should be attached to that interpretation. but both the average surprise and its variance are significant. on closer inspection, this finding seems to relate to the decision in inflation report months – not the publication of the report itself a week later, or the minutes the week after that ( panel e shows that the market reaction to the policy decision is, on average, significantly bigger than the reaction to the report and the minutes ). this might imply that it is the rethink during the preparation of the inflation report that counts. but, once announced, the decision itself ( and the accompanying press notice, if rates have changed ) provides most of the information the market needs to understand the committee ’ s approach. this would be consistent with a fairly high degree of policy predictability. it is worth emphasising that the observed tendency for interest rate changes to coincide with the publication of an inflation report does not imply that interest rate changes are tied in any mechanical way to the central projection for inflation. the assessment of risks is always a material factor in determining policy, as well as an important aspect of the presentation of the forecast. for example in our latest inflation report we published a central projection which showed inflation rising gently but steadily above the 2 % target, assuming a nearly flat profile of interest rates out to three years. but the report noted that the balance of risks was to the downside and singled out some key near term risk areas, such as the household sector. this provided a nuanced background to the mpc ’ s february decision to hold rates unchanged. forecasts and public communication all inflation targeting central banks use their forecasts as a communication tool. they provide a coherent statement of policymakers ’ thinking about the economic outlook and the policy stance. together with the minutes of the policy meetings ( in our case published with individual votes after two weeks ), this helps to discharge the committee ’ s democratic duty to explain itself, as well as supporting its credibility and helping

system, and probably beyond what was reasonable. we need to quit pointing the finger, alternatively, at global macroeconomic and financial system causes, and accept that it was both. the turner report does that. a few points on micro regulation the report and accompanying fsa discussion paper ’ s principal focus is, of course, micro regulation. i have just three points to add or emphasise on that this morning. effective prudential supervision of individual firms relies on the line supervisors being prepared to substitute their views for those of management when they have good reason to believe that the viability or stability of a bank otherwise may be in peril. they need the confidence, when necessary, to face down management, and even boards ; and also to be prepared to take the risk of being overruled on appeal. a respected, self - confident but restrained line supervisor, with the forensic skills to get to the heart of things, can do a very great deal for stability. it is terrific that adair and hector are renewing the emphasis on line supervision. ( but, by the way, when supervisors do their job, their achievements are invisible and they get no thanks. ) second, it is important to remember that most bank failures have their roots in large or concentrated exposures. this crisis is in some respects no exception. it is, therefore, good news for the future that, ahead of this crisis, the eu was already planning to extend the bar on large credit exposures to interbank deposits. line supervisors must additionally look for concentrated exposures to sectors or instruments ; to give just one of many possible examples, large holdings of super - senior cdo tranches just might have been a pointer to the vulnerabilities at some large internationally active banks. and the possibility of fateful concentrations in bank funding structures should be given similar weight. if all that requires more reporting by banks, it would be worth it. third, effective prudential supervision is seriously impeded by complex group structures. that was a headline lesson from the failure of bcci nearly two decades ago ; and eu directives were amended to make unsupervisable structures a ground for withholding or withdrawing authorisation, and so for exercising regulatory powers. but complexity is not just a convenient shield for wickedness. it can also make it hard for management and supervisors to figure out what is going on in a perfectly honest business. the explosion of what i referred to a couple of years ago as vehicular finance