t preceded by an unsustainable boom in output. in the five years leading up to the crisis, overall gdp growth remained close to its long - run average and inflation differed from the 2 % target on average by only 0. 2 percentage points. diverting monetary policy from its goal of price stability risks making the economy less stable and the financial system no more so. to argue that monetary policy should be directed to counter inadequately priced risk is to argue that unemployment is a price worth paying to tame the banking system. inflation targeting is a necessary but not sufficient condition for stability in the economy as a whole. when a policy is necessary but not sufficient, the answer is not to abandon, but to augment, it. indeed, the overarching lesson from this crisis is that the authorities lacked sufficient policy instruments to take effective actions. nowhere was this more evident than in dealing with northern rock in the absence of proper resolution powers. for domestic institutions that particular issue was settled by the banking act 2009, and the new resolution powers were successfully deployed by the bank to deal with the dunfermline building society in march. what other powers are required? there is a broad consensus that our traditional policy instruments need to be augmented by a “ macro - prudential ” toolkit. but what are such “ macro - prudential ” instruments for? are they to increase the resilience of individual banks, or are they to protect the economy from the banks? the former implies a sensible extension of the current regime of capital requirements for individual institutions. the latter goes to the heart of the problems caused by the financial sector as a whole for the rest of the economy. we need to reflect more deeply on the nature of the failures before designing a regulatory response – after all many financial markets continued to function well. but banks entered the crisis with historically low levels of liquid assets, and inadequate levels of capital with which to absorb losses. moreover, in the united kingdom, the financial sector became too big and too highly leveraged. first, the size of our banking system was, as a proportion of gdp, five times that in the united states, and the risks to the uk taxpayer correspondingly greater. second, the process of reducing very high leverage is doing great damage to the rest of the economy. and the required adjustment still has a long way to run – few of the largest banks in the united kingdom managed to reduce their leverage ratios through 2008, which remain at historically high levels. third

opening remarks at oenb monetary policy panel by andrew bailey given at oesterreichische nationalbank, annual economic conference, vienna published on 23 may 2022 remarks this is a time of very large economic shocks, and particularly very large external shocks, most recently from russia ’ s invasion of ukraine. i say that as someone who wholeheartedly supports the cause of ukraine and the assistance we must give. we are in a period of rapidly rising energy, goods and some food prices. these are the most visible prices too. this is by far the main cause of high inflation, and is painful, particularly for those less well off. what can and should monetary policy do? there is a very important distinction between : whether monetary policy can anticipate and stop the effects on inflation of shocks ; and, if not, whether it should respond when they happen? with shocks such as pandemics and wars, the answer to the first question is more likely to be “ no ”. but the answer to the second is very much “ yes, monetary policymakers can and must take the actions needed to return inflation to target over a period that avoids unnecessary volatility in the economy ”. it is domestic actions that have to get us back to price stability. for monetary policy, the choice of policy actions is influenced by the nature of the shock we are facing. in the uk we are facing a very big negative impact on real incomes caused by the rise in prices of things we import, notably energy. we expect that to weigh heavily on demand. we judge the appropriate degree of monetary tightening taking that into account. what i reject is the argument that in our response to covid the bank ’ s monetary policy committee let demand get out of hand and thus stoked inflation. the facts simply do not support this. on the latest number, uk gdp in march was only 0. 6 % above its pre - covid level, and it is substantially below the path it was expected to follow pre - covid. what we do have is a very tight labour market. but that does not look like a story about rapid demand growth. the labour force has shrunk by around 1 % since the onset of covid. it looks much more like an impact from the supply of labour. the job of the bank of england is to return inflation to target at a time when a very large headwind from external shocks, and an internal shock from a fall in the labour force, are reducing real