It would be hard to avoid the country misunderstanding that any such commitment was conditional on the outlook; in other words that our plans could and would change as the outlook changed. And the current strategy has been consistent with a mildly upward-sloping money-market curve, which signals that the market is confident – as it should be – that the MPC will retighten monetary conditions when in due course that is warranted by the medium-term outlook for inflation. Our 2% target is a valuable anchor in shaping and implementing our strategy. In this, insurance companies are by no means on the sidelines. By focusing our purchases on medium and long-maturity gilts, we are aiming in part to shift the composition of the portfolios of long-term investment institutions. And it was encouraging, therefore, that the money holdings of non-bank financial institutions expanded recently. Some economists argue that gilts and central bank money are near perfect substitutes, so that the effect of our Quantitative Easing will be negligible. They may well be close substitutes for traders. But I doubt they are perfect substitutes for insurance companies and pension funds, many of which probably don’t participate in the secured deposit “repo” markets for switching gilts into cash; and which in any case desire assets with a longer “interest-rate duration” than money. If so, holding zero-yielding money balances will not suit them, and we could reasonably hope for increased demand for, perhaps, corporate bonds and other financial assets. Risk premia might decline slightly.
Paul Tucker: The state of the markets – four issues Remarks by Mr Paul Tucker, Deputy Governor, Financial Stability, of the Bank of England, at the Association of British Insurers 2009 Biennial Conference, London, 9 June 2009. *  *  *  Many thanks for the invitation to be here today. The Bank greatly values its relationship with the insurance industry. We are just immensely grateful for the intelligence you provide, as asset managers and insurers; and for our constructive dialogue on policy issues. I have a few brief remarks on four broadly linked issues. The macroeconomic outlook and bank lending Since the beginning of the year I have felt that it will take until late autumn at least to have any kind of a handle on broadly what type of outlook we face. My view on that hasn’t really changed. Of course, over recent weeks near-term indicators, notably the business surveys, have improved a bit. Confidence seems to have stabilised. And that has been most obvious in the financial markets, where the really good news is that firms on both sides of the Atlantic have been raising funds in the equity and bond markets. But a sense of perspective is needed if those apparently small steps forward are not to be frittered away. Inevitably the medium-term outlook remains highly uncertain, and the path back to anything like normality can only be gradual I’m afraid.