This focus is helping to contain inflationary pressures in the near term. Indeed, across advanced economies, wage growth remains weak and labour markets soft. Reflecting the combination of improving, but still subdued, demand and considerable, if uncertain, slack, monetary policy remains exceptionally stimulative. Recall that the recent  BIS central bankers’ speeches  1  decision of the Federal Reserve to begin tapering asset purchases meant only slowing the rate of additional stimulus. And that the 7% unemployment rate in the UK is merely the point at which the MPC begins to even think about adjusting policy. The key question for central banks is the expected evolution of the supply side of their economies. This is unusually uncertain at present. We know that our economies are operating well below their, admittedly unsustainable, pre-crisis trends, but we don’t know how much capacity was destroyed following the crisis. We know that depressed business investment is limiting productivity growth in the short term, but we don’t know to what extent and whether such shortfalls can be caught up. From a longer perspective, we know that total factor productivity growth has slowed over the past decade, but given the incredible flourishing of innovation, we don’t know whether this is due to lags, measurement errors or more fundamental factors. Statistical trend measures of labour productivity growth suggest it has slowed in the United States, the euro area (both core and periphery), the UK and even Korea.
On the other hand, the European Banking Authority (EBA) has demanded a capital increase of the system’s major banks. Finally, US dollar financing pressure persists in some major banks. This has resulted in more stringent credit conditions, which may continue and have a profound impact particularly on small and medium-sized businesses and, eventually, on some countries’ foreign trade. 2  BIS central bankers’ speeches  The situation of the Eurozone is complex and we cannot rule out as a possible risk scenario a disorderly default of peripheral economies, due to the challenging debt maturity profile they face. This high risk scenario is, however, less likely that at the end of last year. The US economic data of the last months have been a pleasant surprise. The labor market and households’ expenditure seem to have behaved better than forecast. Although, the difficulties that persist in the labor market and the fiscal adjustments that are needed explain the continuing doubts as to how true and sustainable the recovery we are currently witnessing is. In spite of the more positive indicators, the Fed authorities extended from 2013 to 2014 the period in which it expects to keep interest rate at minimum levels. Certainly, the problem of fiscal indebtedness continues. In emerging countries the data are diverse. Over the course of the second half of 2011 we witnessed a generalized deterioration of consumer and business expectations. Neither case can be compared to what happened between late 2008 and the beginning of 2009. Generally, the data show a deceleration of activity.