Over the same period, households’ inflation expectations from the Bank/NOP survey have fallen by 90bp, 60bp and 50bp respectively at the one, two and five year horizons. Chart 20 looks at the term structure of expected inflation by households from the Bank/NOP survey, relative to the past and the Bank’s forecasts.12 The term structure of expected inflation is currently lower than at any stage since the crisis. Moreover, household inflation expectations are significantly below 2% at the two-year horizon and, to a lesser extent, thereafter. That means it is unclear, at present, whether household inflation expectations are consistent with the Bank hitting the inflation target. 11  The MPC’s February Inflation Report included a small downside skew to the inflation fan chart, but this did not extend to two years. 12  These have been adjusted to take into account the average difference between perceptions of the level of current inflation and actual inflation. 10  BIS central bankers’ speeches  Chart 19: UK household inflation expectations Citigroup 1 year ahead  Chart 20: Term structure of UK household inflation expectations Per cent  Citigroup 5-10 years ahead  Per cent  Vintage Series (2009 - 2014) Feb 2015 IR CPI Data NOP Feb 2015  5 4  6 5 4  3 3 2  2  1  1  0 2006  2008  2010  2012  2014  Sources: Citigroup. Dashed lines show series 2005–07 averages.
From a more macro perspective, these risks may impair productivity and also cause a reallocation of resources, not only of physical capital, but also of labour, through migration. Special features of climate change risk factors In general, these risks can be considered to manifest themselves in financial institutions through the traditional financial risk categories (credit, market, liquidity, operational and reputational risk). However, climate change incorporates some fundamental special features into these traditional risks, which must be taken into account if they are to be managed and supervised appropriately.7 First, the consequences of climate change are unprecedented and will occur over a very prolonged period. Historical experience is thus of little use to assess their magnitude and evolution, and therefore the uncertainty associated with how and when they will materialise is very high. Second, that uncertainty is exacerbated by the fact that the physical and transition risks are interrelated non-linearly, and possibly subject to tipping points. This, in essence, means that the magnitude of the effects of their materialisation could be greater than expected and will affect economic agents more generally and more abruptly than other risks. Third, the problem has a global dimension. There is little any one country can do on its own to avoid the problem and there may always be free-riders. That is why utmost collaboration and cooperation are required. International organisations and institutions therefore need to play a key role in this area.