Why has the outlook deteriorated so quickly? The banking crisis dealt a severe blow to the availability of credit. Growth in secured lending to households fell to an annualised rate of 1.9% in the three months to August, its lowest level in more than a decade. The Bank of England’s survey of credit conditions suggests that the terms on which banks provide credit to companies have tightened even further. And, on some estimates, the supply of finance to the UK corporate sector has ground to a halt. This credit shock has come on top of a fall in real disposable incomes resulting from the rise in energy and food prices earlier in the year. So, taken together, the combination of a squeeze on real take-home pay and a decline in the availability of credit poses the risk of a sharp and prolonged slowdown in domestic demand. Indeed, it now seems likely that the UK economy is entering a recession. At the same time, consumer price inflation, our target measure, has risen from around the 2% target at the beginning of the year to a worryingly high rate of 5.2% in September. Oil and other commodity and food prices have all been rising very rapidly. In those circumstances, it was sensible to allow those price changes to be absorbed by movements in consumer prices. The alternative would have been an even sharper slowdown in the economy. Central banks in other countries also find themselves in a similar position.
Philip R Lane: The monetary policy toolbox and the effective lower bound Welcome address by Mr Philip R Lane, Member of the Executive Board of the European Central Bank, at the ECB Conference on Monetary Policy “bridging science and practice”, Frankfurt am Main, 11 October 2021. * * * It is a pleasure to welcome you to the 2021 edition of the annual ECB Conference on Monetary Policy. As captured in the title of this year’s event, this conference series serves a vital role in bridging the science and practice of monetary policy. In particular, it is essential for the ECB to incorporate in our analytical framework the theoretical and empirical insights generated by the global academic community, and the conference format (albeit in webinar mode again this year) is very effective in providing us with a platform to discuss the latest developments. The breadth of academic research (in terms of both topics and research techniques) that is relevant for monetary policy is quite wide and this is reflected in the composition of the conference programme. The agenda includes research that exploits financial market data to examine the transmission of monetary policy, studies the impact of the pandemic on firms and banks using entity-level datasets, analyses the interactions between monetary policy and financial stability in a full-scale macroeconomic model, and explores the impact of monetary and fiscal policies on the formation of household expectations.