Here I will explain how our analysis of market structure shaped the design of the Bank’s corporate bond purchase scheme, and how the scheme may have affected the functioning of the market. In both cases our understanding of these markets, informed by market intelligence, analysis and our own experience in previous operations, has been both tested and improved as the Bank has responded to events. Section 1 – Sterling’s headline days during 2016 The foreign exchange markets are core to the broader financial system, processing enormous volumes of transactions and relied upon by a broad range of economic participants from corporates to individuals. The structure of these markets has evolved markedly in recent years, with electronic trading playing an ever greater role, while the amount of balance sheet devoted to this activity by intermediaries has fallen. Benefits of the broader trend towards greater speed and electronification, common across a range of markets, include a reduced cost of transacting – and hence better value for end-users – but these structural changes as a whole have also led some to question whether markets are now less resilient in periods of stress. 1  2  The value of sterling fell by 17% against the US dollar over 2016 , largely as market participants digested the impact of the EU referendum decision on its long-term sustainable level.
•  In the longer run, ageing and slower innovation may push up saving rates and bring down the return on capital. Therefore, the ultimate response to the risk of secular stagnation is to improve the return on investment, thus pushing the natural interest rate back into positive territory. Again, this is not only a European problem. But we do have difficulties in this regard. Structural reforms are not easy. Many, however, are currently being implemented. Italy is abolishing its provinces, generating savings that will allow for a reduction in taxes and liberalising its labour market. France is on the same track and has reduced taxes on its labour costs as well as improving labour market flexibility. III/- short-term policy challenges and responses The main challenge, of course, is low and declining inflation, with inflation expectations in the euro area drifting downward at short to medium-term horizons. This prevents adjustments in relative prices, – an important mechanism to eliminate gaps in competitiveness – and increases the risk of outright deflation, should a negative shock occur in the future. Strangely, in the euro area, growth and inflation are moving in opposite directions. As growth accelerates, inflation keeps going down. This “disconnect” in the Philips curve is puzzling. We must look, then, at the broader picture. Euro area economies have attracted strong capital inflows over the recent months, with two opposite effects on financial conditions: first, easing through lower long-term interest rates. And, second, an appreciation of the euro exchange rate.