Several inflation-targeting central banks (including the Bank of England, Norges Bank and the Riksbank) have for other reasons already extended their forecast horizon from the previously common two years to three years. There is nothing that in principle prevents an inflation targeter from considering forecasts beyond a three-year horizon, but in practice there is usually little information about anything at longer horizons except the tendency to revert to the long-term average. What about “leaning against the wind” (as advocated by, for instance, Borio and White, 2003, and Cecchetti, Genberg and Wadhwani, 2002), the idea that central banks should raise the interest rate more than what appears to be warranted by inflation and resource utilization to counter rapid credit growth and rising asset prices? It has sometimes not been quite clear whether advocates of leaning against the wind mean that credit growth and asset prices should be considered targets and enter the explicit or implicit loss functions alongside inflation and resource utilization, or whether they mean that credit growth and asset prices should still be considered just indicators and are emphasized only because credit growth and asset prices may have potential negative effects on inflation and resource utilization at a longer horizon. In the latter case, leaning against the wind is a way to improve the stability of inflation and resource utilization in the longer run. Then it is completely consistent with flexible inflation targeting.
Market Functioning Speech given by Chris Salmon, Executive Director, Markets, Bank of England  OMFIF City Lecture, London Tuesday 24 January 2017  I am grateful to Charlotte Barton, Nick Butt, Liam Crowley-Reidy, Nick Govier, Tom Horn, Rebecca Jackson, Sarah John and Nick Mclaren for their assistance in preparing this speech. 1  All speeches are available online at www.bankofengland.co.uk/speeches  Introduction  It is a pleasure to be here this evening. The economic and political events of the past twelve months raise many questions. From my vantage point as the head of the Bank of England’s Markets Directorate, they reemphasise the need for central banks to understand the structure and functioning of core financial markets. That matters both for our role as guardians of financial stability, and to ensure the effectiveness of our own operations to implement monetary policy. Let me illustrate this with reference to developments in two very different markets. i)  The first – the sterling FX market – a large, global, highly liquid, and almost continuously traded, market, with a constantly evolving structure. Here, the challenge is to understand how those developments affect the functioning of the market. My focus will be on the lessons about market functioning from two particular episodes last year: the period immediately following the EU referendum and its ‘flash crash’ a few months later. ii)  The second market – the sterling corporate bond market – is small, local, and thinly traded, with heterogeneous underlying assets.