31  Chart 7 Decomposition of sterling-denominated investment-grade corporate bond spreads Bas is p o ints 750 Res id ual (includ ing co mp ens atio n fo r illiq uid ity)  70 0  Co mp ens atio n fo r uncertainty ab o ut d efault lo s s es  6 50  Co mp ens atio n fo r exp ected d efault lo s s es  600  Actual  550 50 0 4 50 400 3 50 300 2 50 200 150 10 0 50 0  97  32  98  99  00  01  02  03  04  05  06  07  08  09  10  Chart 8  Chart 9  Bid-ask spreads on selected assets  Major UK banks’ and LCFI’s leverage ratios(a)(b)  BIS Review 10/2010  Chart 10 Mortgage repayment gearing(a)(b)(c)  Chart 11 Distribution of income gearing (2007 and 2008)  Source: Bureau van Dijk and Bank calculations 1  Solid bars show distribution of income gearing in 2007. Shaded bars show distribution of income gearing in 2008. Income gearing is defined as interest paid divided by earnings before interest payments. BIS Review 10/2010  33  Table 1 Dividends and earnings in the UK and US  Source: Thomson Datastream and Bank calculations. 34  BIS Review 10/2010
This means that the measures have probably achieved and are continuing to achieve greater demand for domestically-produced goods and services, higher employment and thus, ultimately, greater cost and price increases than we otherwise would have experienced. The monetary policy conducted last year can therefore be said to have contributed towards turning the development of inflation and inflation expectations around (see Figures 3 and 7). The positive effect of last year’s measures on inflation expectations is also suggested by the slight increase in what is known as inflation compensation – that is, the difference between the yields for nominal and real government bonds – in conjunction with the announcements of repo rate cuts and bond purchases that came as surprises. Standing prepared to make monetary policy more expansionary Inflation and inflation expectations are now higher than they were one year ago. But, over the autumn, the development of inflation was weaker than we predicted and the rise in inflation is still largely due to the krona being weak. If the rise in inflation is broken, confidence in the inflation target may be weakened. We are therefore prepared to do even more if it proves necessary to safeguard the inflation target. We still have many possible measures in our toolbox. Experiences from the past year suggest that cuts to the repo rate and repo rate path also work below zero and that purchases of securities form a good complement. We can do more in this style if we deem that inflation prospects are changing.