That is why, as Federal Reserve Chairman Bernanke said in London last week, central banks will look to intervene only in markets that “normally play major roles” in the functioning of the financial system. Therefore, the Bank will need to be satisfied that there is a genuine private demand for an asset in normal conditions before it would be eligible for the asset purchase facility. We are aiming to complement and stimulate private demand, not substitute for it. 4  BIS Review 8/2009  The Bank is actively considering in which markets targeted purchases might stimulate new issuance. One example is the corporate bond market. Spreads on high quality corporate bonds have more than doubled since early September to an average of over 5 percentage points. Despite innovation in financial markets this is the highest spread since the mid-1970s. The Bank estimates that a significant element of this spread represents an illiquidity premium which could be reduced somewhat by increasing activity and liquidity in the market. Commercial paper is another case where purchases might help, although that market is considerably smaller in the United Kingdom than in the United States. In each case the Bank will keep the market fully informed, and more details will be published at the end of the month. It will be a matter of weeks not days before a programme of purchases can begin, but it will be weeks not months. There is another reason to tread carefully.
Since the summer, the exchange rate has fallen by almost 20%; and oil prices have fallen by around two-thirds, both of which will boost demand. No one can know at what point the impact of all this stimulus will have a visible effect on activity; the lags in economic policy are notoriously long and unpredictable. But welldesigned policies implemented within a consistent policy framework will eventually work. BIS Review 8/2009  5  1. Ten largest monthly falls in UK equity prices  Percentage change on a year earlier  South Sea  Aug-Sep 1720  Black Monday  Oct-Nov 1987  South Sea  Sep-Oct 1720  10 Se p-10 O ct 2008  10 Sep-10 Oct 2008  Oil shock & secondary bank crisis  Nov-Dec 1973  Oil shock & secondary bank crisis  Jul-Aug 1974  France fall to Germany  Jun-Jul 1940  Oil shock & secondary bank crisis  Feb-Mar 1974  Unexpected rate hike  Aug-Sep 1981  Oil shock & secondary bank crisis  Nov-Dec 1974  2. Chinese electricity production 30 20 10 0 September 2008  -20 Jan 01  -60  -40 -20 Percent change  Jan 03  Jan 05  4.