However, the actual trade-off that is struck will be importantly influenced by MPC members’ views of both the nature of the shocks hitting the economy and the transmission mechanism of monetary policy.17  As the remit states: “In exceptional circumstances, shocks to the economy may be particularly large or the effects of shocks may persist over an extended period, or both. In such circumstances, the Monetary Policy Committee is likely to be faced with more significant trade-offs between the speed with which it aims to bring inflation back to the target and the consideration that should be placed on the variability of output.” 17 For more detail, see ‘Lambda’, speech by Mark Carney at the London School of Economics, 16 January 2017. 16  15  All speeches are available online at www.bankofengland.co.uk/news/speeches  15  Charts 10a and 10b demonstrate how the expected trade-off evolved in successive MPC forecasts since the referendum.
The second broad area of opportunity in a post-LIBOR world comes from the potential for concentrating sterling liquidity into a single interest rate curve referencing compounded overnight SONIA. Today, someone managing a portfolio of sterling interest rate risk can easily find themselves having to deal with multiple different reference curves, each based on a different interest rate index. Figure 3 illustrates five commonly-traded curves (based on SONIA and the one, three, six and twelve month LIBOR fixings) at the start of August 2017 (shortly after Andrew Bailey’s 2017 speech announcing the 2021 deadline for LIBOR transition). Figure 3: Zero coupon swap yield curves (as of 1 August 2017)  Source: Bloomberg data and Bank calculations 7  All speeches are available online at www.bankofengland.co.uk/news/speeches  7  It is challenging enough to manage five or more different interest rate levels. But, to make matters worse, the gaps between these curves – so-called ‘basis’ – can also change quite sharply over time, reflecting variations in the credit premium associated with different lending tenors, structural flows, and other factors. Figure 4 illustrates how the basis between a three year sterling swap referencing the 6 month LIBOR fixing and three swaps referencing 1, 3 and 12 month fixings has moved since 2008. Managing interest rate risk in the presence of such movements is a risky and administratively complex process.