So what can we do? An economic policy that is credible in the long term is, as I said earlier, a very important ingredient in this context. But it is not enough. Rules and institutes that contribute to financial stability are also necessary. This is why international organisations such BIS, IOSCO and the OECD are working to  4  BIS Review 26/2001  strengthen the financial system in various ways. In total, the work covers a dozen different areas, from overseeing and supervising the financial system to observing individual countries' economies and regulations for credit institutes. Allow me to briefly mention, in this context, the capital adequacy regulations worked out by the Basel Committee, as I feel this is a good example of how we can work internationally to create regulations and institutes that contribute to stability, without preventing the important, healthy risk taking. The Basel regulations mean in principle that the greater the risk a bank takes, the more capital it should hold. As capital costs money, the Basel regulations lead to the banks reducing their risk taking. This in turn reduces the risk of bank crises and other disturbances that would have a negative effect on economic growth arising in the financial system. If this is to function, it requires a broad geographical support, which it has. The Regulations from 1988 are applied in more than 120 countries. The Basel Committee has proposed new regulations, which are an extension of the current ones.
And central to the assessment of the outlook for monetary policy, it increases the risk that the inflation that has come to us from abroad gets embedded in more persistent domestic inflationary pressures. Let me draw all of this together, and pull out the implications for monetary policy. The big external shocks – from Russia and supply chains – account both for a large part of the inflation overshoot above target and for the squeeze on real incomes. My sense of the latest data is that the supply chain/goods shock has started to ease, but the Russian impact – particularly on natural gas prices in Europe is going the other way as we look ahead to the winter. The effect of these shocks has been to increase the cost of things we import relative to things we produce domestically. This is a very large shock to our national real income. I think we can already see the effects, with the economy slowing (I would urge caution in interpreting the May GDP number as strong – given  Page 5  the changed pattern of public holidays). Monetary policy has to be set taking into account the scale of this shock to real income, while keeping our focus on inflation and inflation expectations. Returning inflation to its 2% target sustainably remains our absolute priority. But we recognise a trade-off in a situation of high inflation and weakening growth.