Despite a decline in recent days, that expected peak is now around 5¼%. This is by some distance the largest rise in market interest rates between MPC forecasts since the Committee was founded. By way of comparison, Chart 10 plots this increase in market interest rates against one particular, simple representation of how interest rates might have had to respond to a couple of key developments since August: the decline in sterling’s exchange rate and the original, two-year version of the Energy Price Cap. Both would tend to raise medium-term inflation, for any given level of interest rates, and would therefore tend to merit an additional response from policy (all else equal). This is expressed in Chart 10 as the change in something called an “Optimal Policy Projection”, or “OPP”. From time to time, the Committee is shown these OPPs to inform its policy judgement. The Annex provides more background on the OPPs. Bank of England  Page 18  Chart 10: Market interest rates have risen dramatically since the August MPR Percentage points 2.5  2.5 Yield curve news  2.0 1.5 1.0  “Optimal” response to demand effects of energy package and sterling depreciation  0.5 0.0 Dec 2022  2.0 1.5 1.0 0.5  Dec 2023  Dec 2024  0.0 Dec 2025  Chart shows the marginal impact on the OPPs of the original Energy Price guarantee, assuming that energy prices remain flat at a level consistent with the guarantee once it has expired.
The problem naturally lies in the negative rates of credit flow for productive activities other than construction and development, and in the contraction of credit for households, both for house purchases and for other purposes. And, in addition to a problem of volume, there is a problem of prices; our households and firms are paying higher interest rates than the average rates paid for comparable transactions in the euro area as a whole, although these spreads are small in the case of financing for house purchase, very high for consumer loans and also substantial for credit obtained by non-financial corporations. To explain this we must look both at supply-side factors relating to loanable funds by banks, and to demand-side factors on the part of borrowers, households and firms. Concerning the demand for credit, the recessionary environment, high unemployment, the hitherto scant growth prospects and uncertainty are evidently affecting potential borrowers. On the supply side, neither liquidity – provided in a stable fashion and at a low cost by the Eurosystem – nor the shortage of capital would appear to be significant explanatory factors. We believe that on the supply side the two most influential factors are the deleveraging of banks and the lack of projects that may be deemed solvent, or offer sufficient guarantees. There are in fact figures confirming that the most dynamic and productive companies obtain financing; the trajectory of exports is a good indicator in this respect.