As we increase the width of the coloured section by moving from the dark central band to the lighter shades of red further out, the number of outturns that we think will lie within the section increases. The bands are drawn so that the number of outturns increases by 10 for each change of colour intensity. The inflation outturn would be expected to lie somewhere within the entire coloured area on 90 out of 100 occasions. On the same day that the Bank of England produced its forecast for inflation, the Met Office produced a forecast for the temperature in various towns over the following ten days. Chart 7 shows this ‘plume chart’, as the Met Office refers to its fan charts, for the town of Reading. I will leave a detailed explanation to meteorologists, but the interpretation of the temperature plume chart parallels that of the inflation fan chart closely. The width of the plume chart indicates the degree of uncertainty about future temperatures, and different colours suggest different probability bands. And the probability of the central temperature projection - in this case the solid blue line - is extremely small. I am not suggesting that the BBC use such charts in its forecasts, but surely it might give a little more freedom to the meteorologists to use probabilistic thinking in describing the outlook. Such charts can also be used to illustrate uncertainty about longevity.
Thomas Jordan: Monetary policy in a climate of increased uncertainty Summary of a speech by Mr Thomas Jordan, Member of the Governing Board of the Swiss National Bank, at the SNB Money Market Event, Geneva, 1 November 2007. The complete speech can be found in German on the Swiss National Bank’s website (www.snb.ch). *  *  *  Uncertainty about the extent and distribution of losses from US “subprime” mortgages has resulted in a marked squeeze on financial markets. In particular, there is considerable uncertainty concerning the true valuation of securitised assets and structured products based on subprime mortgages. Demand for liquidity has surged. In certain instances, the crisis of confidence among financial market participants was so pronounced that some markets did not function at all. The “re-pricing of risk” has caused risk premia for most financial instruments to soar. Risk premia are important for the Swiss National Bank (SNB) for two reasons. On the one hand, they act as economic signals and should therefore be as unbiased as possible in the way they reflect underlying risks. In addition, there are certain risks attached to extreme values of risk premia. Abrupt and uncontrolled corrections could lead to instability on financial markets and interfere with their smooth functioning. On the other hand, risk premia affect the restrictiveness of monetary policy. An increase in such premia tightens monetary policy. The SNB monetary policy concept, where the three-month Libor is at the centre of the implementation of monetary policy, takes systematic account of changes in risk premia.