Overall there has been some easing in the money markets and some repair in confidence. The complete seizure that was looming has been averted. BIS Review 145/2008  3  However, we are clearly not out of the woods yet. Financial markets across the world are still badly impaired; spreads have not yet returned to their summer levels; and, while banks look more secure, many hedge funds for example are under increased pressure. In the wider economy, we are only in the early stages of a recession in the advanced economies and of the slowdown in emerging markets. So we must be ready to take further action if required whether monetary, fiscal, or directly in the financial sector. Lessons for the medium-term That is the immediate prospect. I want to finish by drawing out some lessons for the medium term. 1. Closer international co-ordination of macroeconomic policy  The first lesson is the vital importance of international cooperation in a global economy. For several years we worried about the growing imbalances between the US in particular and emerging Asia. We can now see how painful the rebalancing is proving. No doubt we could do better in national policy making but we also need to recognise that the sum of policies which make sense at the national level may well not be optimal at the global level. To give one example, for most economies individually a change in the oil price is an external event – something beyond the reach of policy.
In short, the balance of risks between inflation being above or below target in the medium term shifted decisively to the downside. That was the background to the internationally coordinated reductions in interest rates in early October and the aggressive cut of 150 basis points in Bank Rate in November, the largest reduction in official interest rates since 1992 (indeed I believe it was only the third time Bank rate had been cut by 150bp since the Bank was founded over 300 years ago). Even so, our latest medium term projections for inflation show inflation remaining below target in the medium term and suggest further reductions may be necessary (Chart 7). Of course, there are large uncertainties around that projection; more so than usual. In particular, they take no account of any fiscal measures that the Government may announce next week. Just as we had to change gears on monetary policy, so we needed to change our approach to the banking sector. The tripartite authorities – the Bank, FSA and Treasury – were criticised for the handling of Northern Rock and for being slow off the mark when the crisis started in 2007. But we learned from that experience. We have established new ways of providing the market with the liquidity that it needs. And, as the crisis has widened, we have dealt with vulnerable and failing banks, such as Bradford and Bingley, more speedily and cleanly.