andrew sentance : sustaining the recovery speech by mr andrew sentance, member of the monetary policy committee of the bank of england, at the british american business council in association with rsm tenon, london, 13 october 2010. * * * i would like to thank tomasz wieladek and abi hughes for research assistance and i am also grateful for helpful comments from other colleagues. the views expressed are my own and do not necessarily reflect those of the bank of england or other members of the monetary policy committee. i am delighted to be giving this speech this evening here in the heart of westminster and i am grateful to the british american business council for hosting this event and to rsm tenon for sponsoring it. as an active member of the church of england, i am also very pleased to be giving this speech at its headquarters in church house. the church of england plays a vital role in supporting the spiritual health of our nation, just as the bank of england has a key responsibility in underpinning its economic and financial health. a healthy economy is normally a growing economy. so ensuring the right conditions for a sound and sustained recovery is a key challenge for uk monetary policy at present. and it is that challenge that i want to discuss in my speech to you this evening. the current recovery in context the uk economy has been recovering for about a year now. so it is relatively early days to pass judgement on how the current recovery is proceeding. however, the performance of the british economy over the first year of this recovery does provide some grounds for encouragement. the recovery has been somewhat uneven. as chart 1 shows, after a couple of quarters of rather subdued growth at the end of last year and early this year, gdp picked up strongly in the second quarter – producing the largest quarterly rise in gdp for nearly a decade. we do not yet have an official estimate of growth for the third quarter, but the national institute of economic and social research estimates that gdp rose by 0. 5 % in this period. that would produce an annual growth rate of 2. 5 % for the first year of the economic recovery – in line with the historical average growth trend and somewhat stronger than the rebound we saw in the early stages of the previous two economic recoveries, in the early 1980s and early 1990s. 1 the fact that growth has been uneven from quarter to quarter should not be a great surprise as uneven growth is not unusual as an economy begins to recover from recession. this return to economic growth must be

insurers to transfer longevity risk through reinsurance. the risk margin is our first priority as part of the solvency ii review. we are working in eiopa to achieve a sensible outcome. to be clear, though, we are not opposed to use of longevity reinsurance, including to non - uk counterparties, provided risks are properly managed. we set out our expectations in a director ’ s letter more than a year ago. it asked insurers to pre - notify the pra of new longevity risk transfer and hedging arrangements, including the insurer ’ s proposed approach to risk management. we consulted on the content of the letter and published supervisory statement 18 / 16 on ‘ solvency ii : longevity risk transfers ’. this allowed us to track activity and has been a source of useful information to supervisors. our supervisory approach has not changed since. through a programme of in - depth supervisory reviews, we are gaining assurance on insurers ’ risk management. we will then review our expectation to be notified ahead of transactions. with insurers transferring more longevity risk and the associated returns, the profitability of writing annuities depends increasingly on the mix of assets chosen to back them. yields on government bonds are low and spreads on corporate bonds narrow. insurers are therefore searching for yield in less liquid, direct investments. these include equity release mortgages, commercial property and infrastructure financing. based on supervisory information, around 25 % of annuities are backed by such direct investments currently. but insurers have plans for that proportion to increase to 40 % by 2020. these assets can be a good match for long - term annuity liabilities. moreover, increasing investment in real assets may have wider economic benefits. however, they often lack observable market prices and external credit ratings. it is therefore more source : record of the november 2016 financial policy committee meetings published 6 december 2016 http : / / www. bankofengland. co. uk / publications / documents / records / fpc / pdf / 2016 / record1612. pdf http : / / www. bankofengland. co. uk / pra / pages / publications / ss / 2016 / ss1816. aspx all speeches are available online at www. bankofengland. co. uk / speeches difficult for insurers to assess credit and other risks. investing in and managing these assets also requires different skills. for example, when bonds are downgraded