6 An alternative interpretation is that the true expectation of market participants is for Bank Rate to increase more quickly than that, but that they are particularly worried about downside risks and are happy to accept a lower expected return in exchange for insurance against bad outcomes. 7 This would be consistent with the risks to the world economy that have come to the fore over the past year as emerging economies grapple with the twin challenges of transitioning to slower potential output growth and lower commodity prices. Although the direct trade links between emerging economies and the UK are relatively small, the indirect effects of a more dramatic emerging market slowdown through confidence and financial channels could be significant. I suspect this latter interpretation is closer to the reality. Personally speaking, should the downside risks from the world economy fail to materialise, and absent further shocks, once wage growth has returned to a level consistent with inflation returning to target I would expect the economy to warrant a path for Bank Rate that increases more quickly than implied by the market yield curve used to condition the November Inflation Report. I think it is interesting to note that surveys of economic forecasters – a more direct measure of the expected future path of interest rates – show expectations for a faster pace of increases in Bank Rate. Having said that, I think all agents, and all members of the MPC, expect the future path to be gradual and limited. 3.
Dominant academic paradigm may restrict those who radically incorporate lessons of these days into their studies. And of course, central banks, as always, will be criticized for spoiling the party at its hottest moment by taking away the punch bowl. We should be aware that keeping the old habits will only give us a new and may be more severe crisis in the near future. Thanks to the global efforts, lessons derived from the crisis have already started to initiate dramatic changes in the global financial governance. There have been encouraging developments in recent months to design a new global financial system to prevent future crises. In the recent meeting of G-20 finance ministers and central bank governors, member  BIS Review 120/2009  1  countries confirmed their commitments to the principles of strengthening transparency and accountability, enhancing sound regulation, promoting integrity in financial markets, and reinforcing international cooperation. I believe the establishment of Financial Stability Board with increased participation of emerging countries is a critical step in achieving these objectives. In recent years, as a byproduct of market-oriented structural reforms and prudent macroeconomic policies, the share of emerging countries in world output and their role in global financial markets has significantly increased. Now, we are faced with a more diversified group of countries with different objectives and interests. Since the rise of emerging economies has dispersed economic power, decision-making process and international cooperation has become more complicated.