It also, as I have noted, amplifies market corrections as leveraged investors are forced to sell when credit dries up. I do not start from the view that leverage poses the same scale or nature of risks in the market-based finance world as it does in banking. But nor am I confident at present that it is without systemic risk. We do not have the tools to make that assessment yet. We need a better set of lenses through which to view leverage in this world in order to assess the risks that it might pose to the system as a whole – hence the work now underway in IOSCO and elsewhere. The use of financial leverage i.e. borrowing to gear up exposure to risk looks to be materially lower in market-based finance than in the banking world. 14  Bank of England (2014) Baranova et. al. (2017) 16 Recommendations for Liquidity Risk Management for Collective Investment Schemes, February 2018 17 As reported in Bank of England Financial Stability Report, November 2017. The in-depth assessment will seek to develop the FPC’s understanding of how non-banks use leverage, and what financial stability benefits and risks arise from leverage. It will examine measures of leverage and its distribution throughout the non-bank financial system. 15  7  All speeches are available online at www.bankofengland.co.uk/speeches  7  Retail investment funds in most jurisdictions are heavily constrained by regulation on the amount of borrowing they can do. In the UK, insurance companies are limited users of financial leverage.
This is probably the key reason why the flexibility on our part can chiefly be said to be reflected in “exceptions” to the policy rule, rather than it being explicitly described in terms of a continual procedure of balancing concerns for output and inflation stability. I do not think this way of handling the flexibility issue is in any way unique to Sweden but instead is fairly typical. One of our experiences is that we have found it quite difficult from time to time to get this kind of message across, at least when the flexibility is reflected in an unchanged or raised policy rate, as opposed to a cut. In such circumstances it seems to be rather hard to debunk the idea that monetary policy should be conducted according to a mechanical rule that says that the policy rate, regardless of what forces are acting on the economy at the time, should always be set to ensure that the inflation forecast at a given time horizon meets the target. On those occasions we have found it appropriate to depart from our policy rule in this regard, our actions have all too seldom been taken in the public domain as a sign that we conduct a flexible inflation targeting policy. Instead, the interpretation at times has been that we have changed our way of conducting monetary policy or that we have decided, for some more or less obscure reason, to maintain a certain line irrespective of what our forecasts tell us.