Recent surveys of professional forecasters suggest they believe, unanimously, that the next rise in UK rates is likely to be upwards. 19  For example, a simple approximation to the assumption that policymakers care about the risks to the inflation outlook is the use of a “quadratic loss function” to characterise preferences over alternative outcomes. One implication of that approximation is that policymakers should care about the mean path of inflation (see Svensson (2002)). Policymakers who take into account the risks associated with uncertainty over the structure of the economy (such as those discussed earlier in this speech) should care about the entire distribution of inflation (Svensson and Williams (2005)). 16  BIS central bankers’ speeches  But financial market participants have a more nuanced view. They currently assign a roughly 15% probability to UK interest rates being cut over the next 12 months, versus a 40% probability of a rise (Chart 28). The most likely outcome, in their view, is that rates will not change over the next year. I do not currently see an immediate case for a policy change in either direction. If one were required, given the asymmetry of inflation risks, I think the chances of a rate rise or cut are broadly evenly balanced. In other words, my view would be that policy may need to move off either foot in the immediate period ahead, depending on which way risks break.
Chart 12 10-year euro area GDP-weighted sovereign bond spread versus euro OIS rate  https://www.ecb.europa.eu/press/key/date/2020/html/ecb.sp200519~e5203d3520.en.html  8/14  5/19/2020  Pandemic central banking: the monetary stance, market stabilisation and liquidity  (percentages per annum)  Sources: Refinitiv and ECB calculations. Notes: Daily data. The latest observations are for 14 May 2020. This tightening of financial conditions represented a further headwind for the effectiveness of monetary policy. There was an evident risk of adverse liquidity spirals and an overshooting of asset price corrections in many markets, impeding the transmission of monetary policy and endangering financial stability. In the context of a monetary union, the absence of currency risk means that flight-to-safety dynamics have an intrinsic cross-border element, which primarily takes the form of reallocations across sovereign bond markets. In view of the central role of sovereign yields as benchmarks in pricing assets and setting lending rates, non-fundamental volatility in sovereign spreads impairs the transmission of monetary policy. In this context, the PEPP announcement acted as a stabilising force. The announcement of the PEPP has successfully halted the tightening in financial conditions and contributed to a partial reversal in the trend. The embedded flexibility of the PEPP, which allows for fluctuations in the distribution of purchase flows over time, across asset classes and among jurisdictions, has been a crucial element in fostering its effective market stabilisation function.