In the end, monetary policy can only help smooth the adjustment to the major real shock that an abrupt No Deal Brexit would entail, but even its ability to do that would be constrained by the limits to the MPC’s tolerance of above target inflation. While the possibility of No Deal has increased, it is not a given. Along another path, it is possible that domestic political events or negotiations with the EU could lead to a longer period of uncertainty over the eventual future relationship, even in the event that an agreement is struck. On past performance, the longer these uncertainties persist, the more likely it is that growth will remain below potential raising the prospect of both softer domestically generated inflation and resurgent imported inflation if recent sterling weakness were to endure. Once again, the MPC would need to weigh the opposing forces when setting policy. Finally, some form of agreement remains possible. After all, that is the avowed preference of both the UK and EU. In this event, consistent with the MPC’s most recent projections, as details of the future relationship gradually emerge, business investment recovers and household spending picks up, resulting in excess demand and inflationary pressures gradually building. In the Committee’s judgment, this path for the economy would likely require limited and gradual interest rate increases. The coming months could be decisive. If there are material Brexit developments, the MPC will transparently assess their implications and set policy to achieve the 2% inflation target in a sustainable manner. I.
As the directives produced by the EU are often compromises between views expressed by different countries, it is not certain that the final result will be the most efficient solution for the securities markets. If the EU wants to promote competitive economies, it must also ensure that this does not result in a competitive advantage based on more or less explicit subsidies. The best way to build up competitiveness is by creating environments for competition. It is only then that the economies will become efficient. Competitiveness in itself is not the goal; efficiency is. Some issues for the future In this speech I have pointed out some long-term developments that affect the future of the securities markets. Unfortunately, they give rise to more questions than answers. I would like to conclude with a few questions you can ponder. In recent years, inflation in many countries has fallen, and inflation expectations have stabilised at a level that reflects the monetary policy targets. This can reasonably be said to have reduced the uncertainty in the financial markets caused by fluctuating prices. Interest rates have also fallen and this, combined with reduced uncertainty over price trends, has increased households’ incentives for borrowing. It has affected house prices, but may also affect other asset prices. At the same time, it strengthens institutional investors’ search for yield. Does this mean that the risks in the financial system will increase and make it easier for exaggerated speculation, such as the IT bubble in the stock market, to develop?