164 Quarterly Bulletin 2011 Q2 Bank of England speeches A short summary of speeches made by Bank personnel since time to allow the economy to recover before the eventual publication of the previous Bulletin are listed below. policy normalisation begins. The challenges of the ‘New global economy’ Building resilient financial systems: macroprudential regimes Andrew Sentance, Monetary Policy Committee member, and securities market regulation May 2011. Paul Tucker, Deputy Governor, May 2011. www.bankofengland.co.uk/publications/speeches/2011/ www.bankofengland.co.uk/publications/speeches/2011/ speech500.pdf speech498.pdf In a speech to the Jersey Chamber of Commerce, In a speech at the International Council of Securities Dr Andrew Sentance described the way in which the global Associations Annual General Meeting, Paul Tucker discussed economy has become more integrated and the challenges that how the regulation of securities markets fits into the poses. Four main forces have come together — new development of macroprudential regimes. He explained how technologies, trade liberalisation, political change and market banking and securities markets have become less distinct over deregulation. This has presented three challenges for recent decades, with implications for both in banking policymakers: first, an ongoing process of structural change supervision and securities regulation. He discussed whether, created by the shift in global economic gravity towards Asia; from a financial stability perspective, a distinction between second, a prolonged period of upward pressure on energy and ‘intra-financial firm markets’ and ‘end-user markets’ might be commodity prices; and third, increased potential for global more useful than the more familiar distinction made by economic volatility. In the face of these challenges, he argued securities regulators between ‘public markets’ and ‘private that monetary policy should continue to be guided by price markets’. He went on to describe various ways in which stability and seek to counteract global inflationary pressures listing authorities and securities regulators could do more to through influencing the exchange rate, the demand climate detect and contain risks to stability. and price expectations. Continuing to accommodate inflation without adjusting monetary policy poses a threat to the The economic outlook credibility of the monetary policy framework and may damage Charles Bean, Deputy Governor, May 2011. longer-term economic growth. www.bankofengland.co.uk/publications/speeches/2011/ The economic outlook: some remarks on monetary policy speech497.pdf Paul Fisher, Executive Director for Markets, May 2011. In a speech to the Northern Ireland Chamber of Commerce, www.bankofengland.co.uk/publications/speeches/2011/ Deputy Governor Charles Bean described the economic speech499.pdf outlook and changes in the UK economy. He asked whether the recent slowing of growth represented a temporary In this speech, Paul Fisher set out his personal views on ‘soft patch’ or indicated a prolonged period of slower growth. monetary policy. Over the past couple of years, inflation has He said that consumer and public spending were likely to been driven higher by changes in VAT, energy and import remain subdued but that the MPC expected both business prices. Given the lags involved in the transmission mechanism investment and net trade to contribute positively to growth and the need for rebalancing, Paul thought that there was little over the next few years. He went on to describe the puzzling monetary policy should have done to offset these various weakness in productivity growth and the temporary factors price-level shocks, although the combination of high inflation which were contributing to the currently elevated level of and slow growth does pose a significant challenge for inflation. Charles Bean concluded by noting that there would policymakers. likely be a difficult period ahead as living standards adjusted to the impact of substantial shocks to the economy, but that Paul then discussed his views on consumer spending, spare monetary policy, which sought to smooth the adjustment capacity and inflation expectations, concluding that the risks path, would be consistent with the MPC’s remit. to medium-term inflation are broadly balanced around the 2% target. But given his immediate concerns about consumption, he believed that raising Bank Rate could be exactly the wrong thing to do at this precise moment, and that there remains Quarterly Bulletin Speeches 165 The supervisory approach of the Prudential Regulation Keynote speech to the Building Societies Association Annual Authority Conference Andrew Bailey, Executive Director, Prudential Regulation Andrew Bailey, Executive Director, Prudential Regulation Authority — Deputy CEO designate, May 2011. Authority — Deputy CEO designate, May 2011. www.bankofengland.co.uk/publications/speeches/2011/ www.bankofengland.co.uk/publications/speeches/2011/ speech496.pdf speech494.pdf In this speech, Andrew Bailey set out how the PRA intends to In this speech, Andrew Bailey discussed the impact of the crisis approach supervision of banks and investment firms. He on building societies and retail banking more generally and emphasised the PRA’s proposed new single statutory objective what that means for the future. Andrew began by addressing of promoting financial stability in the United Kingdom and the issue of promoting diversity in the banking industry and importantly that the PRA will not seek to avoid failure of specifically mutuals, saying he is in favour of promoting regulated firms ‘at all costs’. He highlighted that the PRA will competition in the banking industry. But he explained that we want to ensure firms carry out their business in a way that need to be very careful what we mean by promoting minimises any adverse effects on the financial system, competition and diversity because both need to be including by seeking to ensure that those firms that do fail can sustainable. Andrew went on to discuss competition saying be closed in an orderly manner. that competition in banking needs careful assessment to understand the nuances. Andrew ended his speech by noting Andrew set out some of the PRA’s key features, including the importance of good risk management systems that help forward-looking judgement-based supervision, a focus on firm management to understand the risks inherent in their resolvability, a new risk framework assessing risks to financial businesses and the need to attract and retain senior stability, regular contact with PRA senior management for management and board members of the right calibre. systemically important firms, high-quality data, purposive rules and a proactive approach to influencing the international Key issues for UK monetary policy debate. Andrew Sentance, Monetary Policy Committee member, April 2011. The short long Andrew Haldane, Executive Director for Financial Stability, www.bankofengland.co.uk/publications/speeches/2011/ May 2011. speech493.pdf www.bankofengland.co.uk/publications/speeches/2011/ In a speech in Manchester, Dr Andrew Sentance discussed four speech495.pdf key issues that contributed to his difference of view from the majority on the MPC over the past year. First, was the At the 29th SUERF (Société Universitaire Européene de powerful influence of global inflationary pressures, which he Recherches Financières) Colloquium in Brussels, expected to be more persistent than the current Inflation Andrew Haldane discussed a paper written with Richard Davies Report forecast assumed. Second, was the role of sterling in on the effects of short-termism in investment UK monetary policy, which he argued was an important decision-making. Mr Haldane began by outlining the existing channel through which monetary stimulus transmitted empirical and quantitative evidence for short-termism, which inflationary impetus to the economy. Third, he argued that is broadly consistent with the theory that capital myopia may the relationship between the ‘output gap’ and inflation was be rising. He went on to construct a set of quantitative tests uncertain, and a wide range of evidence suggested little to assess the significance and scale of short-termism in equity dampening impact on inflation from spare capacity. Fourth, markets, by examining whether expected future cash flows are he pointed to the key roles of credibility and inflation discounted excessively in the determination of equity prices expectations in keeping inflation on target over the medium today. The empirical tests suggested that there is significant term, highlighting the risk that persistent inflation over-runs evidence of short-termism over the past few decades across all without policy reactions could lead to upward drifts in industrial sectors. Finally, Mr Haldane outlined the expectations and a loss of credibility. implications of this for the real economy, namely that some projects may be rejected because future cash flows are discounted too heavily, reducing investment and growth. Public policy responses to this market failure include greater transparency about long-term performance, improved governance, better contract design and tax or subsidy measures. 166 Quarterly Bulletin 2011 Q2 Macroprudential policy: building financial stability institutions Japan can — and will — be a normal economy again Paul Tucker, Deputy Governor, April 2011. Adam Posen, Monetary Policy Committee member, April 2011. www.bankofengland.co.uk/publications/speeches/2011/ speech492.pdf www.bankofengland.co.uk/publications/speeches/2011/