Concerns that household or government debt will weigh on demand could cause firms to delay further their already weak investment spending (Chart 8 – see annex). Such rational corporate caution is consistent with the behaviour of many financial asset prices, which appear to be pricing the possibility of material downside tail risks, such as that economic weakness and persistently low global inflation become mutually reinforcing.11 This fear of fear itself might be reflected in other asset prices too; in particular those that measure or are influenced by inflation expectations. Along with measures from household surveys, some of these have fallen in recent months.12 Those expectations matter as they feed into the wage and price setting processes that ultimately determine inflation. That is why central banks are keenly alert to the possibility that low inflation could de-anchor mediumterm inflation expectations, increasing the persistence of inflation. 10  In UK-weighted terms, global output is estimated at 2% below potential. 11  Yields on sovereign bonds remain exceptionally low. In the six months to January, estimates of the equity risk premium rose by over 100bps in the UK and the euro area back to levels last seen in the heart of the crisis – December 2008 for the UK and June 2012 for the euro area. In addition, the probability of large declines in equity prices implied by options prices rebounded during 2014. Discussed in Carney, M (2015), “Fortune favours the bold”, Lecture to honour the memory of The Honourable James Michael Flaherty, P.C., Iveagh House, Dublin.
6  BIS central bankers’ speeches  With domestic demand growing at around 3% in 2014, the fastest for ten years, all these factors will underpin the momentum needed to bring domestic cost growth back to up to a rate consistent with the inflation target. The fall in inflation we’ve experienced is in large part down to falling energy prices. It is not generalised “deflation” proper. The proportion of prices that are falling is consistent with the average over the past decade. The Bank will be vigilant in monitoring inflation expectations. Declining headline inflation seems likely to have cooled households’ inflation expectations as the prices of the goods they buy frequently – like fuel and food – have declined markedly. On balance, however, inflation expectations remain broadly consistent with the 2% inflation target. As the MPC noted in our February Inflation Report, we retain considerable policy options in the event that downside risks materialise. 6. Conclusion  The Bank of England’s inflation target is symmetric. We care as much about inflation below target as above. With inflation below target and unemployment above its long-run sustainable rate, we are aiming to return inflation to target as quickly as possible. In our most recent forecast, The Bank expects to return inflation to target within two years and to make limited and gradual increases in Bank Rate over the next three years in order to achieve that in a sustainable manner.