11  But to set a higher requirement if we have doubts about: the home  resolution strategy, the availability of a surplus at the top of the group or a lack of reciprocity in MREL-setting in other jurisdictions (that is others all set at the 90% end of the range). We expect to say more about surplus MREL and the form it should be held in to be readily available when we come to finalise our internal MREL policy next year. Another important objective for us in setting policy on internal MREL is to avoid any distortion in the sequence of loss absorption between operating companies (OpCo) and the group holding company (HoldCo). We require UK banks to issue external MREL out of their HoldCos, structurally subordinated to liabilities at the OpCo. The issuance proceeds are then onlent to the OpCo as internal MREL broadly mirroring their external form, for example: Tier 2 could be onlent as Tier 2, AT1 as AT1 and senior debt out of HoldCo would be downstreamed as an internal debt instrument sitting senior to capital instruments but junior to operating liabilities in the OpCo. We need to be sure that as losses are incurred in the operating company they are absorbed in an order that follows the OpCo creditor hierarchy and does not bypass certain instruments.
It is not yet possible to tell to what extent the U.S. economy will experience a lengthy, more difficult process of adjustment. That is probably the background to how the Federal Reserve has acted in recent years. A series of interest rate hikes during 1999 and 2000 were presumably intended to restrain the euphoria and excessive expansion. When a downturn then became evident, it seemed  2  BIS Review 26/2001  desirable to try to limit the mood swing by means of the marked interest rate cuts we have seen this year. It is precisely the Federal Reserve’s vigorous action that underlies certain analysts’ view that the current economic slowdown will be fairly mild and brief. If international activity were to move into a recovery, most things suggest that demand in the Swedish economy would start rising rapidly again. The earlier capacity restrictions would then return to the agenda, with the attendant risk of an accelerating rate of inflation. So the situation is difficult to assess and I grant that the judgements our Executive Board has had to make in connection with the present Inflation Report have been more difficult than usual. While the difficulty in predicting the future is admittedly a truism, the present international economic situation is perhaps the trickiest for a decade. Growth with a balanced picture of inflation The main scenario we have adopted in the Inflation Report envisages weaker real economic activity in the rest of the world, with the slowdown in the United States in the foreground.