But a spread is only defined around some mid-price, whether market or model-determined – and the former may simply not exist in dysfunctional markets, leaving it hard to avoid being a price setter, whether you like it or not. We found ourselves coming close to this in our index linked gilt purchases, where a near-complete lack of liquidity required us to set an additional level of reserve pricing in levels terms (a ‘reference yield’ below which we  Page 12  would not buy) to ensure we both removed the threat of renewed dysfunction while also preventing yields from falling to levels that would leave us acting as the entire market (Figure 5). That proved workable for a few days – whether it could be applied over longer periods is an important question for future reflection. Questions for future research Let me end with some questions for future research, drawing on points I’ve made today: First, we need a clearer sense of how much market dysfunction societies are willing to tolerate – whether defined in terms of a certain spread around risk-free rates, a certain level of liquidity, or the absence of unstable firesale dynamics. And, we need a clearer sense of the extent to which this tolerance should be achieved through self-insurance by market participants (in particular non-banks) – with the residual presumptively falling to public authorities to backstop through tail risk insurance.
While there were no big surprises for the CPIEFE regarding expectations in March, headline inflation figures were below projections, affected by some temporary factors which are expected to reverse in the coming months. On one hand, the decline in international fuel prices, along with an appreciation of the peso in the first four months of the year, reflected in lower energy inflation. The recent depreciation of the peso will help to reverse this situation soon. Electric power has also helped to keep inflation low, but this effect is reversible once the impact of refunds implemented in April and May fades away and the forthcoming entry into force of new price regulation. In addition, the low basis for comparison of June 2012 will mean that CPI inflation will enter the tolerance range in the coming months. With respect to the CPI measurement, and as I pointed out on when I presented the last Monetary Policy Report to this Commission, I want to reiterate that the measurement of this index and other statistics, poses many methodological and practical challenges that must be dealt with in a continuous and transparent fashion. The improvements announced by the National Statistics Institute to the measurement methodology of certain specific products in the basket, as well as other improvements to be made on the occasion of the regular review of the household basket, are most welcome.