5 turning to london, the need to finance successive wars – the spanish war of succession, the austrian war of succession, and the seven years war – gave rise to a financial revolution in the eighteenth century. the establishment of the bank of england – although private at the time – enhanced the state ’ s opportunity to borrow, and led to the establishment of a genuine capital market which attracted savings, and where joint - stock companies and government securities were traded. london consolidated its position as a leading international financial centre in the nineteenth century following britain ’ s expansion as the dominant player in the world economy after the napoleonic wars. productivity gains from technological innovations ( such as mechanisation of textiles, use of coal in the metallurgical industry and use of steam ) during the industrial revolution further enhanced its position as an already great trading and colonial power. 6 1 / 4 bis central bankers'speeches brexit and global capital markets the city ’ s international pre - eminence developed over 250 years. agglomeration benefits in terms of labour and scale reinforced the city ’ s attractiveness. 7 the uk now receives the second largest fdi inflows in the world and the largest in the eu. over half of the stock of uk fdi is in financial services. most financial transactions in the eu – three quarters of the hedging activity, more than three quarters of the fx activity, half of the lending and half of the securities transactions – take place in the uk, irrespective of where the counterparties are based. 8 in this context, it is fair to say that both central banks and firms must grapple with sizeable and specific issues associated with brexit. broadly speaking, it is not unreasonable to assume that much of this fdi is predicated on uk access to the single market, and a portion will be diverted to other member states when britain leaves. however, estimating the impact of brexit on the geography of international financial centres is complex. in this regard, research undertaken by staff at the central bank of ireland shows location decisions of non - bank financial fdi are driven by the very same factors that are traditionally regarded as determinants of investment decisions in more traditional sectors of the economy. 9 specifically, the research finds that barriers between the home and host, market size, regulation and taxes, as well as other traditional gravity variables such as sharing a common border, currency, language and legal system have an impact on firms ’ location decision.

to initiate a rapid sequence of policy rate hikes to above their estimated neutral levels. according to survey and market - based proxies, this would require bringing policy rates well into positive territory ( slide 8 ). however, these are not the conditions that we are facing today. rather, the economy is evolving in ways that suggest that, after a long period of very subdued price pressures, inflation is increasingly likely to stabilise in close proximity to our 2 % target over the medium term. the current inflation outlook therefore calls for a gradual normalisation of our policy stance, reflecting the significant progress made towards meeting our inflation target in the future. during such a process of gradual normalisation, the focus should be first on unwinding step - bystep the exceptional measures we took to fight low inflation, starting with net asset purchases. the degree to which policy will need to be adjusted over time depends on how the inflation outlook continues to evolve. the focus on ending net asset purchases first reflects, at least in part, the fact that their side effects tend to increase over time. 5 5 / 8 bis central bankers'speeches the experience of the past few years demonstrates, for example, that balance sheet policies have a significantly larger impact on house prices than changes in short - term policy rates, thereby contributing to the measurable rise in residential real estate prices ( slide 9 ). 6 similarly, years of balance sheet expansion have caused the bond free float in some economies to decline to very low levels ( slide 10, left - hand chart ). as such, an end to net asset purchases enhances the availability of safe assets that the market requires to function well ( slide 10, righthand chart ). 7 ending net asset purchases when inflation is robustly converging to our target also credibly underlines that our actions are solely guided by our mandate, refuting concerns about fiscal dominance. finally, in the current environment of large imported inflation, reversing the current exceptional measures has the potential to mitigate inflationary pressures even without the usual long lag in policy transmission. over the past years, these measures have contributed to large capital outflows from the euro area, thereby putting downward pressure on the euro exchange rate ( slide 11 ). the exit from these measures can thus support the currency and, for a net importer of energy, provide tangible and immediate support to euro area households and firms by improving the terms of trade. choice of policy instruments the second aspect relates to the