But this does not mean that the international economy has been inoculated against new, unexpected shocks. Remember that noone predicted the extent and course of the Asian crisis. Neither were the risks that led to last autumn’s international financial turbulence highlighted in advance. Our knowledge of phenomena of this kind is limited. It may be asked whether it will ever be possible to predict such matters accurately. The models with leading indicators that are being tested at present  1  BIS Review 106/1999  tend to be too blunt. They are liable to sound the alarm about things that never occur and miss those that do happen. The picture is bright at present but we know that some countries are in a vulnerable position that can suddenly deteriorate. Stock market prices are notably high, not least in the United States. The existing imbalances in the US economy may have effects in the future. But as the course of such events is genuinely difficult to foresee, central banks have little option but to deal with a new situation if and when it arises. Repo rate too low in a longer perspective After the series of reductions, the repo rate is currently 2.90%. Over a complete business cycle, such a level would probably be too low, even in an economy where inflation expectations have settled down around the targeted rate of 2%. So the present monetary stance can be said to be relatively expansionary.
Companies comment to us that the time and resources needed to win new business and secure contracts has increased sharply in the face of weak demand.7 I’m sure that these mechanisms and many more like them are at work today. But are they sufficiently strong for us to be confident that the likely relationship between growth and inflation would be unusually favourable were demand to increase strongly? Why should these mechanisms be so much more pronounced now than in previous recessions? Wouldn’t most of them have seemed equally important in the past? I find it hard to believe that these types of effects are the entire – or even the main – explanation for the weakness in productivity. What is unusual about this downturn is that it has been associated with a severe and prolonged financial crisis. Several of our banks are still not in a position to lend normally. Many firms have had to economise on working capital as the cost has increased and the availability reduced. The ability of many SMEs to raise finance to fund new investments or business expansion has been constrained. The efficiency with which banks have been able (or willing) to reallocate funds from outdated businesses and sectors towards new and dynamic companies has been stunted.