David Ramsden: Going with the flow

Good afternoon, I’m honoured to have been invited to the European Systemic Risk Board (ESRB) conference today to, along with the other panellists, contribute to a subject as important and topical as liquidity risk in a higher rate environment. I look forward to adding my perspectives as not only a member of the Bank of England’s Monetary Policy Committee (MPC) and as the Deputy Governor responsible for our central banking operations and use of the Bank of England’s balance sheet including to backstop liquidity, but also as a member of the Financial Policy Committee responsible for financial stability issues, just as my colleagues are here at the ESRB.

So why is the subject so topical?

Firstly, markets expect that rates will remain higher for longer when compared to the very low levels that prevailed between the global financial crisis and the pandemic and so market participants will be looking at whether the factors that were responsible for low interest rates are likely to persist going forward. It is possible that market perceptions of the equilibrium real interest rate have risen in recent years. Separately, a rise in term premia (the additional compensation that investors require to hold longer-term bonds have been a driver in the most recent rise in longer-term global yields). In part, that could reflect increased uncertainty around the economic outlook and interest rates, as well as an evolving assessment of the balance of supply and demand in government bond markets. Since we completed the MPC’s November forecast there has been some fall back in global yields which may reflect a partial unwinding of some of these shorter-term factors.

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