As a consequence, even as the recovery strengthened and survey indicators of output growth reached levels previously associated with sharp policy tightenings (Chart 4), market expectations about the future path of policy remained subdued (Chart 3). Participants understood the conditionality of guidance, as they and the MPC learnt that there was still considerable spare capacity in the economy. 8  All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx  8  Chart 4: Forward market interest rates rose only modestly as unemployment fell towards 7% Data published showing Percent unemployment fell to 6.9% 4.0  August 2013 guidance issued  February 2014 guidance issued  3.5 3.0  Counterfactual path for Bank Rate based on historic correlation with survey indicators of output growth  2.5 2.0 1.5  UK 1 year instantaneous forward OIS rates  1.0 0.5 0.0  Jan. 12  Jul. 12  Jan. 13  Jul. 13  Jan. 14  Jul. 14  The MPC’s second use of guidance responded to another structural development: the sharp fall in the equilibrium real interest rate, or r*. Out of that guidance came the phrase ‘limited and gradual’, so often repeated it is now part of the monetary policy furniture. In fact, it recently celebrated its fifth birthday.
It recommended the introduction of limits on the proportion of new mortgages at high LTI ratios. The momentum in the housing market cooled and the limits have not so far been reached. It is impossible to say how much this was a result of the Committee’s action; a number of other important factors were also in play. But it is an example of the FPC’s approach to adjusting policy to respond to changing risks. And it is also an example of the Committee taking a broad view of financial stability that goes wider than direct risks to the banking system. A further example of how macroprudential risk can develop outside the banking system is the lending and investment that happens through financial markets rather than through banks. To take one example, the global asset management sector has grown by 60% since 2003 and is now a similar size to the global commercial banking system. This will probably be one  2  6  The July 2015 FSR identified the following major risks facing the UK financial system: the global environment notably Greece and China; market liquidity; UK current account deficit; UK housing market; misconduct; and cyber risk. BIS central bankers’ speeches  of the new frontiers of macro (and micro) prudential regulation. The FPC is exploring whether there are significant risks from changes in these markets and in particular how asset managers manage liquidity to meet redemptions in times of stress. There is also work underway on this internationally.