3  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  3  happened over the past year isn’t a surprise, given the drop in employment (Chart 2 provides the comparison). Whatever their contribution to recent rates of inflation we can at any rate expect the effects of lower participation and the CJRS to fade soon enough. The participation rate is likely to rise again as the labour market recovers and the furlough scheme is being wound down. So today, in the interests of thinking about what might prove more persistent sources of inflation, I want to concentrate on other things, stuff that’s not directly evident from the aggregate data. In doing so I’ll be expanding on a theme – the broad description might be “mismatch” – that I touched on in a talk earlier this year and that my fellow MPC members Michael Saunders and Jonathan Haskel have also developed in their recent speeches3. One of the things I pointed out at that time was that, despite the weakness in aggregate UK consumption, some areas of spending had been pretty strong. Broadly speaking, and for understandable reasons, the pandemic had induced a sizeable shift in UK consumer spending from services to goods. And shifts in spending of this sort, at least until (and unless) they’re met by matching shifts in supply, tend to push up average prices. In part that’s just because retail goods prices tend to be more flexible than those of services.
Moreover, the ratio of total credit to nonhydrocarbon GDP remained stable, whereas credit to the private sector/nonhydrocarbon GDP increased somewhat in 2013 to reach 23.45% (21.35% in 2011). In 2013, while pursuing their provisioning efforts, banks consolidated their financial soundness indicators. Solvency ratios remain high, much higher than required under the prevailing regulation and in line with the recommended level under Basel III. The banking sector soundness is anchored to high capital adequacy ratios and high profitability and liquidity. The solvency ratios are in line with those of comparable emerging market economies. In 2013, an assessment of the banking sector carried out by the International Monetary Fund and the World Bank has helped define further directions in deepening banking sector reforms and strengthening banking system stability in Algeria. Effective implementation has started in the first quarter of 2014 with the enactment by the Council on Money and Credit of three regulations related to the solvency ratios, large exposures and participations, and loans classification and provisioning. The minimum Tier 1 capital ratio has now been set at 9.5%, higher than recommended by the Basel Committee, and the regulatory capital ratio has been set at 12%. Moreover, as regards the strengthening of the capacity in assessing the banking sector risk, Bank of Algeria will rely, as of the beginning of 2015, on the effective use of the new stress test model, and on the generalization of the bank rating system.