•  So the PRA’s approach to prudential supervision entails making judgments of the kind:  •  Your bank isn’t as strong as you think it is  •  Cut back on the risk in your book  •  I’m afraid you’re not fit to run the bank  •  your business could not be resolved in an orderly way if it fails. •  This shift from rules to judgment changes the relationship between the regulator and business, and is an important example of what this series of talks is about. •  Challenge is how to make a judgment-based approach acceptable when we use it in earnest. Is our society really ready again for judgments from the Old Lady? •  Part of the solution is public law. The Bank must follow due process when it deploys its statutory powers, and that is subject to judicial review in the courts and appeal tribunals. •  But there is also a wider question about how society as a whole will keep us accountable or, more simply, just see what is going on during the periods, sometimes years, in which banks do not fail and the financial waters are – or at least seem to be – calm. Which brings me to our monetary and macroprudential roles, which indirectly touch every business, and household, in the country.
Interest rates had been very low for more than a decade, and they are still lower than they were before the global financial crisis. The ECB has not been alone in how it has acted. Some central banks started to normalise their monetary policy even earlier, and the exit from the highly accommodative monetary policy has been swifter than was expected. Headline inflation started to come down towards the end of last year, mainly thanks to a decline in energy prices, and it fell to 8.5% in January. More worrying however is that  5/8  BIS - Central bankers' speeches  core inflation has remained persistently high at more than 5%, as the underlying price pressures are not yet receding. The ECB Governing Council consequently announced last month that it will continue to raise interest rates and keep them high enough to bring inflation back to its target of two per cent in the medium term. We also indicated that we intend to raise interest rates by another 50 basis points at our next monetary policy meeting in March. It is most likely this will not be the last rate rise in this cycle, and it is quite possible that interest rates will need to stay high for quite some time so that we can be sure that inflation will come back to, and remain at, close to two per cent.