It is important that these judgments are made by experts. But, also like monetary policy, the consequences of these expert judgments have potentially wide-ranging effects on society. So they should only take place within a clear public framework of delegated authority. This combination of expert discretion within public parameters is sometimes termed “constrained discretion”. The large scale LOLR interventions undertaken by the UK authorities during the financial crisis played a significant role in preventing a much deeper economic and financial collapse. But they also exposed a number of shortcomings in the Bank’s pre-crisis frameworks. Through the course of the crisis, and subsequently, that framework has been transformed through an extensive series of public reforms 1. In the rest of my remarks today I want to draw out from that work four particular lessons from the crisis that have helped the UK in its quest to plot a more effective course between “too little” and “too much”. Four lessons from the crisis in the United Kingdom The first lesson drawn by the UK authorities was that a key part of reducing the risk of conducting “too much” LOLR is having effective and coordinated macro- and microprudential supervisory and resolution regimes. Pre-crisis, the UK lacked a comprehensive micro-prudential liquidity regulation framework, and banking supervision did not focus enough on liquidity management. This meant that many banks took too much liquidity risk.
We have already seen a significant number of positive effects from these monetary policy decisions. Financial market conditions and the cost of external finance for the private economy have eased further, also following our previous monetary policy measures. In particular, borrowing conditions for firms and households have improved considerably. Moreover, money and credit dynamics have been firming. The substantial additional easing of our monetary policy stance supports and reinforces the emergence of more favourable developments for the euro area economy. In an environment of improving business and consumer sentiment, the transmission of our measures to the real economy will strengthen, contributing to a further improvement in the outlook for economic growth and a reduction in economic slack. Thereby, our measures will contribute to a sustained return of inflation towards a level below, but close to, 2% over the medium term and underpin the firm anchoring of medium to long-term inflation expectations. Let me now explain our assessment in greater detail, starting with the economic analysis. According to Eurostat’s flash estimate, real GDP in the euro area rose by 0.3%, quarter on quarter, in the last quarter of 2014, which was somewhat higher than previously expected. The latest economic data and, particularly, survey evidence available up to February point to some further improvements in economic activity at the beginning of this year. Looking ahead, we expect the economic recovery to broaden and strengthen gradually. The low level of the price of oil should continue to support households’ real disposable income and corporate profitability.