These benefits to financial stability complement the critical role that capital markets play in efficient resource allocation and in reducing overreliance on the banking sector for the mobilization of savings and financial intermediation. Additionally, diversified financial markets provide investors with alternative asset classes in times of financial stress. However, developing such markets is a long-term process that requires proper planning, appropriate prioritization and decisive action in several successive stages. Divert efforts from further development of financial markets Financial markets in EE’s have become more interlinked within the local and global financial systems, but they are still shallow and prone to sudden price movements and greater disruption that may undermine confidence in their integrity. It is therefore important that the ongoing fundamental reforms in emerging financial markets continue and that these longer term priorities are not forgotten as a consequence of predominant focusing on the policy response to the financial crisis and on the accomplishment of the international regulatory reform agenda. In this sense, a decisive action is needed to develop a domestic investor base, address market illiquidity, and improve key aspects of market infrastructure in order to mitigate risks to emerging economies’ financial stability. Ultimately, development of bond markets, money markets and government securities markets is the optimal route for further progress on this front. The assistance of international partners in this area is of a key importance and should not be neglected in conditions of growing challenges of different size and shape on both sides.
So even if inflation is now high, people can trust inflation to come back down to target. As a result, savers have come to demand a lower premium to compensate for expected inflation. But it is not just nominal interest rates that have fallen. If we adjust nominal interest rates for inflation and look at real interest rates, we can see that they have fallen too. Chart 2 shows the UK ten-year real interest rate, measured directly from index-linked bond prices. It is clear that the real interest rate is quite responsive to cyclical events, and that it has risen sharply over the past year. But beneath the volatility, there appears to have been a fairly steady downward trend from the 1990s at least up until the onset of the Covid pandemic. Bank of England  Page 6  Chart 2: The UK ten-year real rate has fallen over recent decades Ten-year zero coupon yield (spot interest rate) from UK index-linked gilts (a) Per cent 6  6  4  4  2  2  0  0  -2  -2  -4 1985  -4 1990  1995  2000  2005  2010  2015  2020  (a) Sources: Bloomberg Finance L.P, Tradeweb and Bank calculations. Much has been said about this trend in risk-free interest rates.