inflation expectations, we have also added a financial stability override determined by our financial policy committee. this guidance is intended primarily to clarify our reaction function and thus make policy more effective, rather than to inject additional stimulus by pre - committing to a time - inconsistent “ lower for longer ” policy path in the manner of woodford ( 2012 ). while such a timeinconsistent policy may be desirable in theory, in an individualistic committee like ours, with a regular turnover of members, it is not possible to implement a mechanism that would credibly bind future members in the manner required. nevertheless, by reducing uncertainty about our behaviour, we are aiming to encourage households and businesses to spend and invest. the knowledge that monetary policy will not be tightened until the uk ’ s fledgling recovery is secured should boost confidence. moreover, it should reduce the likelihood that the present expansionary monetary stance is withdrawn prematurely through an upward movement in market interest rates. short - term yields have moved up since our announcement on a string of good news about the economy, but the unemployment threshold, by serving as a reminder of just how much growth is needed to regain lost ground, should temper the extent of any tightening. indeed, for that reason, guidance is potentially more valuable during exit than during entry. finally, given the uncertainty about the causes and durability of the recent exceptional weakness in uk productivity growth, it also provides a robust framework within which to test the scope for economic expansion without jeopardising price or financial stability. while guidance – and good central bank communication more generally – will be important during exit, i doubt very much that good central bank communications alone can ensure that it will be completely smooth. when a central bank ’ s reaction function is not well understood, market interest rates tend to respond to policymakers ’ actions in response to economic data. but when the reaction function is well understood, market interest rates will instead respond earlier as the economic data unfolds. although there are benefits to the market more accurately anticipating a given policy decision, because the data are likely to evolve in an imperfectly predictable fashion, so will market interest rates and asset prices. in sum, then, exit will be challenging, both for the central banks in the countries withdrawing stimulus and those in other countries that will be affected by the international spillovers. but we do have the luxury of knowing that it will come eventually and can plan for it appropriately. and when it does come, it should be against the background

categorise sources of threat there are of course a number of ways one could cut the cake. credit exposure to emerging sovereign debtors for example can appear in the “ credit ” and “ international architecture ” boxes. iii ) activities now we can move to the rows. to use the matrix as a location device to focus our efforts, decide on deliverables and enhance our resource allocation, we need to create the “ boxes ” by considering the types of activity we could undertake to address each main source of threat – the rows. a ) assessment of threats firstly we need to evaluate threats to the system. we need a process of data collection and assessment to analyse information and market intelligence from multiple sources. this “ horizon scanning ” enables us to get early warning of how and where threats could appear. we cannot do all this without knowing how markets work. typically we obtain intelligence about what is going on from a number of sources, including a group of experienced staff who are operationally active in financial markets. we then evaluate and assess the threats from this intelligence. this needs people who are motivated to think through and identify new aspects of risk and threats, who can move with intellectual agility and flexibility between risks as they arise. this enables in turn high level management to judge the risk and allocate resources accordingly for risk reduction – as well as stopping work if threats no longer seem relevant. a key challenge here is distinguishing between slow burn issues ( such as a gradual shift towards more exotic financial instruments ) and the more immediate issues relating to, say, the prospect of a major market default. in each case it is important to understand the potential threats to financial stability : but the timescales and tools are different. the matrix helps to start the process. above all we have to clarify the types of threats we are looking for. an issue here is the risk of “ missing something ”. not acting on something seemingly minor may have significant consequences for financial stability and costs compared to the resource saved by ignoring it. so the stakes are high in getting this right – though we need here to be realistic as particularly in the early stages the significance of developments can be hard to read. b ) risk reduction secondly, risk reduction or mitigation. here we seek to make the financial system more resilient. this is the world of risk management, prudential standards, liquidity standards, resilience of payment systems etc. it can involve the promotion of codes and standards over a wide field ranging