21  All speeches are available online at www.bankofengland.co.uk/speeches  21  Chart 15: Trade-off that emerged after the referendum has diminished  UK households, businesses and financial markets have reacted at different speeds and to varying degrees to the prospects for the UK’s departure from the EU. In general, some of the disinflationary shock to demand has been deferred, not least because the UK has not yet left the EU, while most of the inflationary channels have begun to appear. Financial markets, particularly sterling, marked down the UK’s relative prospects quickly and sharply. The sterling ERI has depreciated by around 20% since the Brexit process became a possibility. UK focused equities have underperformed global advanced economy equities by around 30pp since the Referendum (in common currency terms) and UK long-run real yields are down by 60bp compared to those for the US. Households looked through Brexit-related uncertainties initially. But more recently, as the consequences of sterling’s fall have shown up in the shops and squeezed their real incomes, they have cut back on spending, slowing the economy. Businesses have been somewhere in between. Since the referendum, they have invested much less aggressively than usual in response to an otherwise very favourable environment (strong external environment, low cost of capital, favourable rates of profitability and limited spare capacity).
These figures are currently distorted by the sharp fall in mobile phone fees, but the Bank of Japan continues to expect CPI inflation to be only close to 1.1% in 2022 and 2023. Not so long ago, many commentators were worried about a possible “Japanification” of the euro area. They were wrong, and should be reassured today: the ECB’s resolute action has been successful in preventing this risk and avoided falling into a trap where economic agents’ expectations remain deflationary (“deflationary mind” as the Japanese often say). These differences between the United States, Japan and the euro area explain the different paces of their monetary reactions. The ECB remains very vigilant about prices and wages dynamics, and will gradually adjust its monetary policy to firmly ensure that inflation recedes soon and then stabilises around its 2% target over the medium term. In our case, we think that 1/3  BIS central bankers' speeches  this gradual and sequential approach – first tapering, second lift off, and eventually downsizing – is appropriate. But we keep our full optionality about the speed of this sequence, and will definitely be data driven. II. Two great transformations are underway The present Covid crisis and inflation hump – serious though they are – should not let us forget the two “Great transformations” – the ecological and the digital ones – that we will all have to pursue in the long run.