Charles Bean: The Monetary Policy Committee’s policy dilemma Speech by Mr Charles Bean, Deputy Governor for Monetary Policy of the Bank of England, at the Association of British Insurers’ (ABI) Economics and Research Conference, London, 3 March 2011. *  *  *  Almost three years ago, in April 2008 when the financial crisis was still in its early days, I gave a speech entitled “Walking the Tightrope” 1 . In that speech, I noted that the United Kingdom was faced with an unenviable conjunction of developments. On the one hand, the dislocation in credit markets was weighing on demand. In due course, that could be expected to put downward pressure on inflation. On the other hand, rapid growth in the emerging economies, especially in Asia, had put upward pressure on oil prices, which went on to peak at nearly $ a barrel in July of that year. Higher oil prices were squeezing demand too, but were adding to, rather than reducing, inflation. In the face of these twin forces, activity began to fall, but consumer price inflation rose sharply, reaching 5.2% in September. For the first eight months of that year, the Monetary Policy Committee was faced with setting interest rates so as to balance the risk of downward pressure on inflation from a sharp slowdown in growth associated with the financial crisis, against the risk that the period of high oil prices and elevated inflation would result in a wage-price spiral.
But this disentangling is done, or is at least attempted in this paper, and the pieces of evidence that are provided in it point precisely to the importance of the financial reform. Let me give you some results that in my opinion are relevant: i) we find that banks with higher capital ratios suffered less in terms of, for example, increases in CDS spreads; ii) we also find that strongly capitalised banks showed greater increases in lending than other banks, and, iii) a third result is that the uptake of the public support measures was higher precisely in those banks that had higher capital ratios. The interesting thing about this evaluation is that at the same time there might be some lessons to learn. We are already highlighting some pieces of the regulatory reform that might not be working as intended and let me focus on one issue on which Claudio has also worked in depth in recent years, which is to understand whether capital and liquidity buffers are  2  usable as envisaged. We wanted banks to have higher levels of capital precisely to be used in a situation of crisis. So, if in the end we observe that this capital is not being used, there is a problem, and we might need to modify some parts of the legislation. The evidence is that banks might have been hesitant to use the regulatory capital buffers had it been deemed necessary in practice.