in the future. it ’ s needed because the financial system itself is changing. it ’ s to be welcomed that the system has become more diverse. non - banks – and i mean things that really aren ’ t banks, rather than the ‘ shadow banks ’ that proliferated before the crisis – have become more important. in this country, they ’ ve grown by almost 40 %. that ’ s a net positive for the stability of the system and to its ability to channel savings into long - term investment. but that doesn ’ t mean the non - bank system is perfect at serving the economy in bad times and good. in particular, the structures in which long - term investments are held matters. pretending such investments are liquid when they are not creates dangers. all speeches are available online at www. bankofengland. co. uk / news / speeches in that regard, the growth of open - ended investment funds, many offering investors the chance to redeem their share in the fund at a day ’ s notice, is notable. they have more than doubled in size since the crisis. as they ’ ve grown, these funds have invested increasingly in illiquid assets. open - ended mainstream equity funds have been joined by corporate bond, leveraged loan, commercial property and emerging market debt funds. that growth has been an important source of finance for our economy. for example, these funds hold at least a quarter of the additional corporate bonds issued by uk businesses since 2008. so their stability has economic significance. it has the potential to become a systemic issue. while there is a role for these funds in our system, they do have a structural flaw when they start holding less liquid and truly illiquid assets. despite offering investors the chance to redeem their share at a day ’ s notice, they typically offer a price for the share based on the quoted market prices of the funds ’ assets. but when you hold anything other than the most liquid assets, it can be difficult to realise those quoted prices in one day, especially if a fund is forced to sell in scale. it can take weeks or sometimes months. this isn ’ t a problem when some investors are buying in as others are selling out. none of a fund ’ s assets actually need to be sold to pay redeeming investors. but when a fund experiences only redemptions, it can be a real issue. if redeeming investors are receiving a higher price for the assets than the fund can obtain when selling them

, it seems that many firms have maintained prices, not cut them, in the face of weak demand. that may have been a rational response. in order to survive they needed to maximise their present cash flow and they would only have cut prices if the demand response was likely to outweigh the lost revenue. comparisons with behaviour in previous post - war recessions are difficult, partly because inflation was much higher during those episodes. one of the benefits from low inflation is that firms can concentrate on real relativities rather than decisions being dominated by the general rise in prices. whatever the reason, the downwards pressure which normally arises from a fall in output, has not been sufficient to push inflation negative. the explanations for these changes in behaviour and their inflationary consequences are likely to be many and varied. and it may be some time before we can be sure which of many hypotheses are correct. but one factor we know is that interest rates have been at an all - time historic low during this recession ( chart 7 ). and bank rate started to fall well before the trough in output. the effect of this on, for example, firms ’ cash flow, has been very significant and was reinforced by the effects of the asset purchase programme reducing corporate borrowing costs. it seems a reasonable starting assumption that behaviour during the recession should be broadly symmetric during the recovery. when demand growth strengthens, output could be flexibly ratcheted up, reversing the processes seen during the downturn. if so, then it is unlikely that substantial inflationary pressure would be generated as the result of a recovery in demand : there will be plenty of capacity within firms and a ready supply of labour, both of which should help to keep costs subdued. but this is clearly a major uncertainty and hence a risk in our projections of future inflation. not only has the uk economy behaved differently from its previous experience, it has also behaved differently from other countries. in the united states for example, the fall in employment relative to output has been larger than in the united kingdom ( chart 8 ). weak downwards pressure on inflation from the recession can only go so far in helping understand recent movements in inflation. it cannot explain why inflation has been rising recently. for that we need to look at a series of shocks to relative prices that have put temporary upwards pressure on cpi inflation. these shocks include the change in the vat rate ; changes in oil ( and hence petrol ) prices and changes in the prices of imports relative