Although technically these entail secured deposits with banks, they are not money holdings that get spent (on assets or goods), and are matched pretty well by secured (repo) loans to other parts of the financial system. The ‘OFI’ category is somewhat amorphous, including for example both private equity funds and Special Purpose Vehicles. Collectively, their holdings of bank deposits have been growing at an annual rate of over 40% for the past two years. It is extremely difficult to judge the macroeconomic significance of this, not least because no breakdown is available of the money holdings of different types of ‘OFI’. On the one hand, it may be uninvested cash, reflecting for example the wave of fund raising by the private equity industry. That is most definitely cash to be invested in the equity market, but such fund raisings are highly publicised and conceivably may already have been discounted in  13  ‘Other’ in the sense of not being a member of the monetary sector (commercial banks and building societies). 14  Chrystal K A and P Mizen (2001), ‘Other financial corporations: Cinderella or ugly sister of empirical monetary economics’, Bank of England Working Paper, No. 151. 15  The other intermediaries grouped with securities dealers include financial leasing companies and bank holding companies. BIS Review 2/2007  5  equity prices via M&A speculation. As for SPVs, they are used for all sorts of purposes. Some effect transactions within banking groups, and should ideally be netted off.
With headline inflation tangibly above target in the run up to the main, New Year wage bargaining season and with the market clearly expecting that policy would be tightened, a small increase in Bank Rate was, on balance, warranted to avoid any misperception that our reaction function had altered. Strategically, the significance of this account is in the uncertainty injected by structural change; in this case, from migration. Of course, there is a host of demand-side uncertainties: about consumption, export growth and so on. But they fit comfortably into the MPC’s framework of producing a conditional forecast of probability ranges around a central projection. The supply-side uncertainties are something else – much harder to calibrate and potentially going to how we read and act on the economy. Inward migration is just the most obvious reason the monetary transmission mechanism might have altered. In reviewing globalisation more generally, others have described how the short-run relationship between aggregate demand and inflation may be weakened by firms’ enhanced capacity to switch production between countries, including via outsourcing, in the face of capacity and cost pressures. As policy makers discuss these issues it could become a commonplace that, in such an environment, central banks would have no choice but to respond more aggressively whenever inflation deviates from target; that, compared with the past, we would need to make bigger changes in interest rates, since bigger shifts in demand would be needed to bring inflation back to target.