There is no mechanical link between any piece of data and inflation – despite the impression often created by newspaper headlines. Policy cannot be set by a simple scorecard. There is no substitute for asking the question “why?” One of the achievements of Alan Greenspan during his time as Chairman of the Federal Reserve Board was his recognition that when output growth picked up in the United States in the late 1990s it reflected an increase in supply capacity as productivity growth rose in the wake of the application of IT to business processes generally. This “supply shock” meant that output could expand faster without generating inflation. “Spotting the shock” is a perpetual challenge for us. The shocks we have identified are the reasons we raised Bank Rate four times over the past year. We spotted them by asking three questions, all beginning with “why”. So let me give you those questions and our answers. The first question is why total output has grown steadily at an annualised rate of around 3% for 18 months – the longest run of stable output growth since 1997 and much stronger than most commentators anticipated, even though interest rates and the sterling exchange rate have risen. And why are business surveys even more upbeat? Notwithstanding a slowdown in the United States, the world economy, especially the euro area, our largest export market, has been surprisingly buoyant. World GDP growth over the past three years has averaged over 5% a year, the strongest such period since the late 1960s.
In my view, the task could be easier achieved if the focus of EWE is narrowed down to the really important systemic issues i.e, the issues that have high-global impact but are beyond the capabilities of market and individual economies to monitor and make assessment. For example, instead of trying to spot vulnerabilities in all the possible key risk, in all markets, and in all economies, EWE should narrow its focus instead on the systemically-important issues, especially the known-unknowns. This include the robustness of the key global financial markets and infrastructure, risk relating to the systemically-important large economies and the operations of the internationally-important financial institutions. Such focus will make the whole EWE process more valuable and complements well with the surveillance that are done elsewhere at the country or regional level. With regards to the nature of future crises, a few realities have emerged from the current global financial turmoil. First, it is clear from recent experience that nobody is above crisis. Crisis can happen in any economy regardless of whether it is large or small, developed or emerging, with or without a sophisticated financial system, and regardless of whether the country adopts a fixed or flexible exchange rate system. And once happens, the impact is large because of the  BIS Review 19/2010  1  globalized nature of markets that drives the spillover or contagion. For emerging markets, this means the risk of future crises are wide-ranging and can be both externally and internally induced.