and economic environment that give us pause for thought. market prices are at historically unusual levels : real and nominal returns on risk free assets are low and credit spreads are tight, both in traditional and structured products. it is of course hard to say definitively the extent to which today ’ s markets are merely reflecting changed fundamentals. but it is quite possible that some investors have unwittingly taken on higher levels of risk in pursuit of what they would consider to be “ normal ” levels of return. and it is certainly prudent to plan for the possibility of a sharp reversion of prices to historically more normal levels ( or even beyond them, given the tendency of markets to overshoot ). there could be a period of impaired market liquidity during any such correction. one could imagine a number of potential catalysts for such a correction, ranging from a geo - political event to some form of major operational disruption. the bank concurs with the widely held view that the growth of markets in risk transfer should contribute to greater financial stability, by allowing a more efficient dispersion of risks. but the depth and reliability of the more recently developed markets in risk under stressed conditions has not yet been fully tested. moreover, risk transfer markets can, and probably at present do make the ultimate destination of risks more opaque. this hampers our ability to assess the overall stability of the financial system, and, potentially, to react effectively in a crisis. 3. how have firms reacted to these changes? the banking industry has, not surprisingly, responded to these changes by paying greater attention to liquidity risk management. and, as well as day - to - day management, banks have given more consideration to how they would cope with extreme or ‘ tail ’ events. banks have developed, or are at least in the process of developing, sophisticated scenario analyses, and are assessing the contingency arrangements that would be required to respond to these scenarios. it is certainly encouraging to observe the determination with which many banks are addressing liquidity risk, and it is at the same time noteworthy how efficiency drivers have led many banking groups to take a more centralised approach to liquidity management. but, despite the progress that banks are making in addressing liquidity risk, the framework that underpins their contingency plans makes a number of assumptions, particularly regarding access to funding markets. there seems, for example, to be a widespread view that, whatever has happened to a firm ’ s access to wholesale unsecured

the euro's weakness gave rise to widespread – but in my view unjustified – criticism of the ecb. the task of a central bank operating an independent monetary policy is necessarily a limited task, not least because it effectively has only one instrument – its control over short - term interest rates. its role – as i said earlier – is essentially, to use that instrument to influence aggregate demand in the economy, with the aim of keeping demand broadly in line with the supply - side capacity of the economy. the measure of its success is consistently low inflation. against that criterion the ecb has been relatively successful. the euro area economy has grown, above trend, with core inflation nevertheless remaining within the tolerance range of 0 - 2 %, even though on the headline measure, influenced by rising oil prices and the weaker exchange rate, inflation has for the time being moved above the top of that range. the ecb would have put that internal stability of the euro area as a whole at risk if it had attempted at the same time to use monetary policy to target the euro's exchange rate. the more recent criticism has been that the ecb has been slow to respond to the weakening of the us economy. implicit in that criticism is no doubt a judgement about the extent and duration of the us slowdown and its likely impact on the euro area. as i have said there is a great deal of uncertainty about that. but the ecb has to take account, too, of domestic demand pressures in the euro area, and of the fact that even on the core measure euro area inflation has been moving up gradually towards the top of the ecb's 0 - 2 % range. frankly i don't see how anyone can be confident whether the ecb has it precisely right or wrong – it is perfectly normal for even the best - informed people to disagree on these judgements, as anyone who reads our own monetary policy committee meeting minutes will tell you. but i am wholly confident that the ecb is sensitive to the issues surrounding those judgements, including the downside risks in the us. so, too, are we in the united kingdom. in our case, we again enjoyed relatively steady overall economic growth last year combined with a further fall in unemployment to its lowest rate for 25 years. inflation meanwhile continued to run somewhat below the government's 2½ % target, partly at least as a result of the dampening effect of sterling's surprisingly persistent strength against the euro. the problem