Indeed in the data collection exercise we have just launched we ask for data on a calibration that combines 35% of medium term average index spreads with just 17.5% of excess spot spreads. Similarly, a lower calibration for the average spreads combined with a higher calibration of the excess spot spreads could achieve the same outcome. We are keen to read responses to the DP and to discuss stakeholders’ views on the CRP and its calibration. The breadth of application of the MA by UK insurers has been a unique aspect of our implementation of Solvency II (Chart 1 ): preserving and, indeed, expanding it further underpins the competitiveness of the sector in the UK. This uniqueness has understandably sent MA reform in different directions in the UK and the EU. The EU has chosen to leave the MA calibration untouched. But, in contrast to our focus on widening investment flexibility and MA eligibility, the  Page 6  EU’s approach is looking to tighten their MA eligibility requirements, particularly for structured assets. Prior to Brexit, the UK regime had already been more accommodating of a broader range of assets as appropriate for MA portfolios, including those that were internally rated. Further divergence in the practical use of MA is now possible, as part of the overall package of UKspecific MA reforms, in a way that preserves the same high level prudential outcomes. Reforms to the risk margin are at a more formed stage than those to the MA.
Indeed, it is worth noting that in 1994,  12  This lack of spare capacity in firms is hard to reconcile with the relatively sharp drop in GDP in the recession and the resilience of employment. However, it is possible that future data revisions may change the profile of GDP during the recession. It is also possible that underlying productivity growth trends were overestimated during the long expansion of the 1990s and 2000s, and that the economy was further above capacity in 2006/7 than was appreciated at the time. 10  BIS Review 158/2010  when the early 90s fiscal consolidation began, the UK economy grew by over 4%, which is still the strongest rate of GDP growth we have seen in any calendar year since the late 1980s. The strength of growth surprised forecasters, who had greatly underestimated the momentum of growth which would be generated by a rebound in private sector demand, a strong world economy and a competitive exchange rate. 13 There is a risk that we are making the same mistake again because of the preoccupation with downside risks following the financial crisis. The second key argument is that higher interest rates should help to exert a brake on abovetarget inflation and keep inflation expectations anchored around the 2% target. There are significant upside risks to the forecast recently published in the Bank’s Inflation Report which could sustain the period of above-target inflation into 2012 and 2013.