As the pace of activity intensifies, we are seeing a sharp increase in interest from both lenders and borrowers in taking advantage of such opportunities. Those who don’t, risk getting caught napping. How the Bank is adapting its own operations to the use of SONIA  Before concluding, I want to spend a moment setting out some of what the Bank of England, as a financial institution with a sizeable balance sheet in its own right, is doing to ensure that it is also ready for LIBOR transition. One of our key messages to firms has been to stop writing new LIBOR-related business that fixes or matures past 2021. The main area in which the Bank undertakes such activity is in the swap programme used to hedge the government’s foreign exchange reserves, which we manage as agent for HM Treasury. Last year, we set up a separate project team to advise the Treasury on its options – scaling the issue, assessing the available trading methods and liquidity in alternative markets, and evaluating the implications for risk and return. In light of that advice, the Treasury decided some months ago to instruct the Bank to cease writing new LIBOR business with fixings falling after 2021, and transact only in SONIA-linked contracts. Our experience of SONIA market liquidity so far has been positive: at least as good, if not rather better, than expected. Another way in which LIBOR potentially touches the Bank’s operations lies in the collateral that we accept in our sterling liquidity facilities.
In the euro area, because the banking system has a more dominant role in the financing of the private sector than the capital market, compared with other economies, the implementation of such measures would be more focused on the banking system. Potential measures could include an extension of the maturity of the central bank liquidity provided to banks and purchases of private debt securities in the secondary market in order to improve its liquidity and reduce the cost of funding of the real economy, thus helping its recovery. Could a further easing of monetary policy contribute to containing potential disinflation risks and provide further support to economic activity? I would like to make two general remarks concerning the role of monetary policy in fostering the economy’s recovery and sustained growth at this juncture and more generally. First, as we have emphasised in the past, the ECB’s monetary policy should ensure that inflation expectations over the medium to longer term remain firmly anchored in line with the Governing Council’s aim to keeping inflation below, but close to, 2%. This anchoring of inflation expectations supports sustainable growth, employment creation and contributes to financial stability. Second, the monetary policy stance should be determined so as to also contribute to a smooth exit strategy from the current exceptional circumstances of historically low rates and unlimited provision of central  BIS Review 38/2009  3  bank money to the banking system.