Because its remit requires it to support strong yet sustainable and balanced growth, in exceptional circumstances, and in consultation with the FPC, the MPC could have to optimise – subject as always to society’s risk preferences – over a longer time horizon in order to avoid inter-temporal disequilibrium, with the 26  E.g. Mian, A and Sufi, A (2014), House of debt, Chicago. See for example, Aikman, D, Haldane, A and Nelson, B, (2015) “Curbing the credit cycle”, Economic Journal, 125(585), June. Though not the only one. Others included the absence of a credible resolution regime for failing institutions, inadequate capital and liquidity standards, excessive complexity and opacity in the financial system, and cultural failings alongside other perverse incentives for excessive risk taking. 29 The full FPC remit can be found here: http://www.bankofengland.co.uk/financialstability/Documents/fpc/letters/chancellorletter160316.pdf 27 28  14  All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches  14  result that inflation could deviate below target temporarily in order to achieve a more sustainable return to the target and more stable growth beyond the conventional policy horizon. 6. The Current Trade-off How do these factors relate to the recent conduct of monetary policy? In May, the MPC said that the effects of a vote to leave the EU on inflation would depend on the balance of its effects on demand, supply and the exchange rate.
The guidelines are based on the above-specified supervisory bodies’ considered opinion that there is no legal or substantive rationale for the maintenance of the previous interest rates (which were determined with reference to foreign interbank rates) after the portion of loan principal bearing such interest has been uncoupled from the exchange rate of the currency concerned by means of the recent Supreme Court decision. The supervisory bodies are of the opinion that such an interpretation of the Supreme Court judgement, were it implemented to the fullest extent possible, would represent such a heavy blow to financial undertakings’ equity that the Treasury would be forced to contribute substantial new capital to them. That expense would ultimately be borne by other members of society. The method recommended by the Central Bank and the Financial Supervisory Authority will preserve the stability of the financial system even in the event that a majority of loan agreements with exchange rate linkage clauses are deemed unlawful, although it could take quite a long time to determine this conclusively. Financial undertakings’ equity will sustain a considerable blow in any case, if judgements by the Supreme Court ultimately extend to a large portion of their loan portfolios. Offsetting this is the fact that uncertainty will have been eliminated, which could provide an opportunity to re-evaluate economic capital at a later time. The financial system should therefore remain sound. Many borrowers with foreign-denominated loans are in an extremely difficult position. Their anger and disappointment are understandable.