Moreover, the output gap forecast, which was revised upwards owing to the better-than-expected growth outlook for 2013 compared to the figures presented in the July Inflation Report, added 0.1 percentage points to the year-end inflation forecast. Developments in the exchange rate and oil prices were also influential on the revision in the inflation forecast for 2014. When evaluated together with output gap forecasts, we expect these cost-side factors to push the inflation rate in 2014 up by 0.3 percentage points. 4  BIS central bankers’ speeches  Although inflation is estimated to fluctuate in the short term due to the base effect on energy prices, we expect it to remain on a downward track. As the effects of the hike in tobacco prices in January 2013 on annual inflation taper off, we expect inflation to plunge in early 2014, and come down to levels consistent with the target by the last quarter of 2014. In addition to these forecasts, alternative scenarios on the inflation outlook and the global economy are discussed in the Risks section of the Inflation Report. You can examine the Report for details. While concluding my remarks, I would like to thank all my colleagues who contributed to the Report, primarily those at the Research and Monetary Policy Department as well as the members of the Monetary Policy Committee, and thank every one of you for your participation. Chart 1  Chart 2. Global Risk Appetite  Portfolio Flows to Emerging Economies (12-Week Moving Average, Billion USD)  Source: Bloomberg, Credit Suisse.
Also, as Panel A in Figure 2 shows, the shape of the yield curve moves similarly, with a flattening of about 150 basis points between the 10‐ and 2‐year US government bonds in the first year.5 In a related phenomenon, shown in panel B, the term premium implicit in the valuation of the 10‐year US government bond also dropped between 1 and 2 percentage points in the two years after the start of the cycle. Essentially, the monetary policy shock and the shift in the yield curve were comparable in both episodes. Indeed, the lack of response of long term rates to short term hikes in the mid 2000s, labeled as the “conundrum” phenomenon by Alan Greenspan was, to some extent, also present in the mid 1990s.6 However, in many dimensions, these two episodes show very distinct features. (See panels C to E in figure 2.) First, during the 1994 one, there was a sharp increase in credit spreads to emerging economies, which contributed to their difficulties in the balance of payments. In less than a year, the EMBI credit spread increased, on average, more than 1,000 basis points. A decade later, Fed Funds increases were followed by secular decline in EMBI spreads for emerging markets. This contrast strikingly with the episode a decade later, when Fed Funds increases not only did not generate an increase in credit spreads but rather it was accompanied by a secular decline in EMBI spreads. A year later, EMBI spreads had fallen about 150 basis points.