expectations, increasing the persistence of inflation. in uk - weighted terms, global output is estimated at 2 % below potential. yields on sovereign bonds remain exceptionally low. in the six months to january, estimates of the equity risk premium rose by over 100bps in the uk and the euro area back to levels last seen in the heart of the crisis – december 2008 for the uk and june 2012 for the euro area. in addition, the probability of large declines in equity prices implied by options prices rebounded during 2014. discussed in carney, m ( 2015 ), “ fortune favours the bold ”, lecture to honour the memory of the honourable james michael flaherty, p. c., iveagh house, dublin. interpreting these trends is not straightforward. household surveys may reflect consumers ’ assessments of the most frequently purchased items, for example, rather than the whole cpi basket. and financial market measures reflect not only expectations about future inflation, but also investors ’ required compensation for inflation risk – the inflation risk premium – and, in the uk, the wedge between cpi and rpi inflation rates. bis central bankers ’ speeches 4. what if inflation is slow to return to target abroad? protracted global weakness could heighten the challenge of returning inflation quickly to target in the uk. that ’ s because weak global conditions would tend to push down on the equilibrium interest rate that would maintain demand in line with supply and inflation at the target. this equilibrium rate has likely been falling for the last three decades and turned sharply negative in the downturn. 13 this meant central banks had to turn to unconventional policy tools to stimulate their economies in order to return inflation to target. in the cases of the uk and the us, these measures have been effective in supporting domestically generated inflation. although the equilibrium rate might be turning positive in the uk as domestic headwinds have abated, it ’ s likely still to be negative in many countries, reflecting an excess of saving over investment, in particular in the euro area. in this regard, the ecb ’ s recent moves to reduce its main refinancing rate to 0. 05 %, its deposit facility rate to – 0. 2 %, and to commence large - scale asset purchases are both timely and welcome. in an environment of low rates everywhere, even bank rate of ½ % might look high - yielding. and the fear of a bad outcome abroad could trigger safe - haven capital flows into the uk that push the value of sterling higher, making

next three years, with a consequent boost in demand for uk exports of around 2 ½ %. lower oil prices will also boost uk domestic demand directly as households spend their windfall. our forecast conservatively assumes that they save 40 pence in every pound of that amount. on balance, there is likely upside risk to growth and inflation from this assumption. oil isn ’ t the only reason why inflation is low globally. measures of inflation that strip out volatile factors – so - called “ core ” inflation – have been trending down as well ( chart 6 ). core inflation rates in the euro area, the us and the uk have declined by between ¾ and 1 percentage points since 2012. core inflation in the uk, currently around 1. 4 %, is likely to decline further in the coming months, reflecting sterling ’ s past strength and muted domestic cost growth. the weakness in core inflation across the globe reflects the shortfall of global demand below global supply ( chart 7 ). 10 in some major economies there are additional disinflationary forces. for example, in the euro area, a series of necessary internal devaluations are weighing on wages and prices. in china, a rebalancing of investment and consumption risks generating further disinflation. the producer price inflation rate has been negative for 35 months in a row, reflecting longstanding overcapacity in industries such as concrete and steel, while the more recent weakness in the property market could further increase excess capacity in related sectors. all this suggests a persistent period of low inflation globally is a possibility, and as i mentioned a few moments ago, could itself create a self - fulfilling fear of a bad outcome. concerns that household or government debt will weigh on demand could cause firms to delay further their already weak investment spending ( chart 8 – see annex ). such rational corporate caution is consistent with the behaviour of many financial asset prices, which appear to be pricing the possibility of material downside tail risks, such as that economic weakness and persistently low global inflation become mutually reinforcing. 11 this fear of fear itself might be reflected in other asset prices too ; in particular those that measure or are influenced by inflation expectations. along with measures from household surveys, some of these have fallen in recent months. 12 those expectations matter as they feed into the wage and price setting processes that ultimately determine inflation. that is why central banks are keenly alert to the possibility that low inflation could de - anchor mediumterm inflation