A series of home-made disasters have also rocked the sector. The UBS “rogue trader”, the losses at JP Morgan’s Chief Investment Office, LIBOR manipulation at Barclays (with others under investigation) and the mis-selling of PPI. These scandals have not so far been institution-threatening, but coming on top of the financial and macroeconomic crisis to date, they have helped to suck confidence from the financial sector just when it might otherwise have been recovering. Chart 3 shows a “heat map” of markets generated by colleagues in the Financial Stability area of the Bank. This chart uses indicators such as issuance amounts and bid-ask spreads to monitor market conditions. Red indicates a non-functioning market. The process of “healing” since 2008/09 that I referred to a year ago is clear. But then the improvement plateaus and starts to reverse in mid-2011. A year ago it looked like conditions were starting to revert to those of late 2008. As the managers of the UK’s foreign exchange reserves we experienced some of these deteriorating conditions at first hand. (It is a neglected point that the Bank of England is a significant participant in the market on behalf of HM Treasury through reserves management operations, as well as being the monetary authority for sterling markets.)
After the end of our net asset purchases, the primary instrument to steer our monetary policy stance is again our key interest rates. And as far as their path is concerned, we continue to expect them to remain at their present levels at least through the summer of 2019, and in any case for as long as necessary to ensure the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term. This rotation of instruments from net purchases to the rate path has been implemented in such a way as to preserve our accommodative monetary policy stance. We have thus not tightened our monetary policy. Moreover, we have made it clear that, in any event, we stand ready to adjust all of our instruments, as appropriate, to ensure that inflation continues to move towards our inflation aim in a sustained manner. President Mario Draghi always stresses that the toolbox is full. But with interest rates at or even below zero and the asset purchase programme at its self-imposed limits, what else is really left? If there is a problem, there needs to be a careful assessment to establish the cause. A financial shock, for instance, is something different from a slowdown in growth for fundamental reasons. In the case of an economic slowdown, interest rates are generally the instrument of choice. If the euro area economy were to slow more sharply, we could adapt our forward guidance on interest rates and this could be complemented by other measures.