Moreover, when the sharp decline in non-agricultural employment is taken into account, it is estimated that the level of disposable income will remain low for a while and the precautionary saving tendency will continue to curb domestic demand. Within this framework, we believe that the recovery in economic activity will be gradual and the downward pressures on inflation will continue. Despite the downward revision in the outlook for economic activity, there have been no major developments that require revising the oil and food price assumptions stated in the past Report. Therefore, the forecasts have been based on a framework in which oil prices would hover around USD 55 per barrel throughout the forecast horizon. The previous assumptions for oil prices at 55 USD per barrel, and food inflation of 7.5 percent for 2009 and 6 percent thereafter are maintained. Distinguished Members of the Press and Dear Guests, In line with the framework that I have presented so far and based on the assumption that there will be measured policy rate cuts in the short run and after that policy rates will be kept constant for a while, our revised forecasts suggest that with 70 percent probability, inflation will be between 4.8 percent and 7.2 percent (mid-point 6.0) at the end of 2009, and between 3.5 percent and 7.1 percent (mid-point 5.3) at the end of 2010. We expect inflation to come down to 4.9 percent by the end of 2011 (Graph 27). Graph 27.
Market-making dealers have not been able to allocate much capital to holding inventories of bonds and hence the market is still not functioning as well as it might. This was one reason why, in January this year, the Bank introduced operations to sell as well as to buy bonds. Further market evolution may be needed to overcome this illiquidity. One possible way forward would be more trading on exchanges. It will be interesting to see whether the recent listing of bonds on the LSE in retail-size amounts is successful. Secured commercial paper and supply chain finance The Bank also considered intervening in other markets such as secured commercial paper (SCP), supply chain finance, syndicated loans and more broadly in ABS markets, as set out in the Chancellor’s original letter to the Bank. 7 Taking secured commercial paper first, this is a form of asset-backed commercial paper (ABCP) based on a bundle of relatively short-term loans to a variety of borrowers. Due to over-collateralisation, the security might be investment grade even if the underlying borrowers are not. By catalysing this market, smaller or lower-rated-firms could gain  6  The difference in price between a cash bond and the Credit Default Swap can be interpreted as a measure of the liquidity premium in cash bonds. 7  The Bank also made provision to buy securities issued under the Credit Guarantee Scheme, using the same format as for its corporate bond purchases. To date, it has not been deemed necessary to activate this facility.