july the economy of the rate

increase would be clear at the end of this year. the end of this year more than the next 12 months? what i said in july and repeated a few times subsequently was that i felt given our forecast the decision about whether or not to begin the process of raising interest rates would come into sharper relief at the turn of the year. the progress has been in recent months, and has been next. growth has ticked down to growing on trend domestic policy has do in line with our expectations. some important cost have been a little softer. we still have a situation where domestic demand in this economy is resilient and private domestic demand is robust.

my reading of today's announcement was they must be happening at what is happening at home, but what is spooking you is the emerging markets. he said the prospects have weekend. how does that apply to china? widget down our medium-term investigation. it is slightly derivative to the to the markets. to such an extent that it has an impact on our forecast. if you look at u.k. weighted growth, our forecast has gone down by about three quarters of a percentage point over two years. that is the cumulative lori of foreign demand.

princely because of emerging markets. we see the chinese economy slowing to about 6%. china is at the center of this but this is not just a china story. >> when you say best estimate, you said before about china's numbers being murky. you said the prospect of banks -- how much do you worry about how much bad stuff there is on the balance sheets of chinese banks? >> i think anytime you have had a sharp increase in credit growth as you have in china and non-japan asia, one can expect there will be an uptick in nonperforming loans. we have not yet seen that. the increase in private credit, the increase in aggregate credit in china has doubled to more than two times gdp over five years. as the economy slows and is normal growth slows in china, to put a figure on that, chinese nominal growth was about 20% in the immediate aftermath of the crisis.

it has slowed to about 6% at present. the debt dynamics get more difficult. one would expect there would be an increase in nonperforming loans and banks would have to adjust to that. >> do you think they are measuring it correctly? >> the issue with nonperforming loans is they have to start nonperforming before you measure them. it is more prospective than actual. i would underscore chinese banks have a strong capital position. chinese authorities are aware of the risks and would take appropriate actions. there is a process of adjustment. that process through the financial sector is one of the reasons we think growth there is going to slow. >> it seems there's a problem underneath it. are there any other emerging markets you are worried about? >> there are a series of issues across emerging markets. latin america has slowed notably. there are a few dynamics here. we all know the commodity super cycle has come to an end so there is trade shot for a number of emerging economies. that impacts brazil, chile, a

variety of african economies. the shift in capital flows has been marked over the past year. sustained capital outflows back into the center potentially reinforced by best economy monetary policy we will see respectively. that also having an impact on growth. the pace of structural reform and productivity growth in these economies has slowed in the last few years. >> disappointed. with a country like brazil, the level of structural reform has not happened. >> i don't want to nail it down on a specific country. i would say as a whole, this is a familiar tale, when capital slowing ends, credit conditions are easy. one can delay those things. now tougher positions need to be taken. our assessment is these are not a series of idiosyncratic issues. they are broader issues. that is why we make bigger adjustments. >> one less thing about china. people look forward to rebalancing of the chinese economy. it moved toward services and consumers away from the export-led model. that seems to be happening in some provinces. it does not necessarily seem to be a good thing.

>> i think it is a good thing. directionally, i think it is positive. we are seeing a pickup in services. that is one reason there is a breakdown between historical relationships between industrial production and commodity prices in chinese growth. that is a positive thing. we are seeing finance reform. the mobilizations of deposit ceilings is positive. some flexibility has been introduced on the currency. it is part of a process that will bring rebalancing and in the medium-term will bring a more sustainable rate of growth in china. it is the second biggest economy in the world. these processes are never perceived smoothly. we will all have to deal with the bumpiness that comes with it. >> janet yellen said yesterday there is a possibility the federal reserve will raise rates. what is your personal guess about when they will raise rates? what assumption are you going on? >> our expectations are the fed will do what is necessary to

achieve their dual mandate. >> that is very brave. >> it is brave. it is also well-grounded. >> you must have some basics and aria about when you expect the fed to raise rates progress our expectation is we look at it that they will pursue a path of interest rate adjustments that are consistent with keeping price stability and the economy growing relative to employment. the u.s. economy is performing well in a new normal sense. this is on the u.s. economy precrisis years. that economy was ultimately unsustainable. it is performing reasonably well. we see them growing in the high twos over our forecast horizon. that is one of the reasons we see our economy continuing to progress. i am quite confident they will make the right decision at the right time. i made a point in the press conference today. i think the fed has been as transparent as they can be about a decision they have not yet taken. >> does that feel familiar to you?

>> it feels very familiar. the point i was trying to make earlier is it is familiar to all central bankers. >> janet yellen is not a bad girlfriend? [laughter] >> we are all reliable as we can be given that we have to do with events as they come forward. when i say i am confident they will take the decisions necessary, it is because i have a reasonable understanding of the reaction function, how they will adjust monetary policy. >> in terms of your timing, does that play a role? i know it is good to play the plucky england where we don't need to worry about what is happening in england. but surely if america does raise rates, it must make a difference to your timing. >> what matters most to our timing is the reasons why u.s. monetary policy adjusts. we would expect the u.s. monetary policy to just because that economy is continuing to grow above trend. there is inflation in the economy and it is appropriate to do so.

i frequently mind people of this. i will remind you as well. all one can look at is history. since we became an inflation target with cycles and two of the five times the bank of england has moved before the fed and before the bank of england, this recovery in u.k. started after the recovery in the u.s. we are catching up. we are now at a point where we more or less have leveled in terms of humility growth. we may have more flexibility in our labor market and the u.s. because more people have stayed in the job market in the u.k. but we will take our decisions. we are certainly informed by what is happening in the u.s. it matters tremendously for our economy.

but we will take our decisions based on what is right for us. >> inflation, can you say something about how you see inflation around the west? people are struggling with the same thing. inflation is very low. is there something about the modern economy suppressing inflation in a way we did not expect before? do you think we start rethinking the way in which the rules are done? >> we have had a severe shock, two severe shocks. one to global demand, as you know. that is multifaceted. the other has been in part because of the financial crisis and in part because of broader factors the equilibrium interest rates consistent with achieving

an inflation target and having the economy grow at full employment have progressively fallen over the years and aggressively fell in the aftermath of the crisis. the ability of central banks to stimulate economies has been challenged. arguably, they have been catching up to provide that degree of stimulus. i would argue in both the u.s. and u.k. what has happened in the last several years has been that because of the repair of the financial system, because of pay down by households of debt, because of some repair on the physical side in those economies, those equilibrium interest rates have been gradually increasing. and we are getting more traction with monetary policy. that is the good news.

if you are a relatively small or a medium-sized open economy like the u.k., you face more of a headwind from abroad because of global disinflationary pressures. in relative terms, we import more global disinflation. it matters more for our ability to hit our inflation target than it does in the u.s. which is relatively closed. we are weighing those countervailing forces related to domestic strength, i would say a robust private sector. >> does core inflation matter more? is that the thing you look at? >> my personal view is that it is important we look at it, particularly because of this imported disinflation. it shows up through core inflation. import prices adjust relatively quickly when the exchange rate goes up or prices go down with main trading partners. but it takes a while to filter through to the end prices in the shop. we have to be conscious of the

extent to which those costs adjust. there is some persistence in that. one of the things we said today bringing together the inflation report is we have adjusted our horizon over which we would return inflation to target because we are recognizing there is some persistence. we might not be able to get inflation back to target as quickly as we previously would have thought if it were a one-time drop in the oil price, if that were the only factor hitting our economy. there are more factors, more persistence. that means we can take longer to get back to target. conversely, monetary policy would be tighter than it otherwise would be in the first scenario. >> that is where the pressure comes? >> that is where the pressure comes. we want to avoid having cost pressures build up too much domestically to the extent once these form factors pass through the economy we are overshooting that inflation target because of domestic strength. we need to balance those better than some other economies. >> george osborne doing a meaningful job in terms of restricting things. how much do you see your job to balance that with monetary

policy? >> the way i would put it is the job of the central bank, particularly the bank of england, is we take fiscal policy as a given. i can aggrandize, but the fact is fiscal policy moves slowly. there is a medium-term fiscal plan in place. it will have certain impacts on the economy. we try to achieve our inflation target given that. it really is only in extreme circumstances that a central bank should ever weigh in on fiscal policy. that is only when the stance of fiscal policy threatens the ability of the central bank to achieve its objectives of financial stability, which is certainly not the case in u.k. >> one other thing that worries outside investors a lot is the prospect of a brexit. when you look at it, is the thing that worries you most about that?

what is the particular thing you think would hurt the financial side of britain and what would you try to stop if that were to happen? >> i think this is another case where we take the arrangements as given. the u.k. is a member of the european union. >> you have to do scenario planning. >> we do have to do contingency planning before extreme risks. this is an example. we are on record saying we will and are doing contingency planning for this. we never disclose contingency plans in advance. we've always disclosed contingency plans once the issue has passed. >> which bit of it would were you, from a central banker's

prospective -- which bit should both try to cover? >> the issues around our relationship with the european union we have detailed in some detail, not just in a speech but in an associated report to that. i think there is a general void from a macro economic perspective which is the u.k. runs a very large account deficit. that is natural given the economy is growing more rapidly than other economies. that deficit needs to be financed. it is financed with solid, largely long-term investments, loans. it is important this economy continues to be an attractive destination for foreign capital. that is a product of many things. our contribution to that is monetary and financial stability, and we will continue to deliver that so all your listeners can continue to

invest. not just listeners, viewers. yes, that they can invest with confidence. >> you said in july you were worried the u.k. would not be able to resolve a big bank failure. is that still the case? to what extent is hsbc delaying leaving for two years -- is that good news? >> that may not be an exact quote, not for the first time. the point we have been making, we are diligently working on ensuring we have all the tools in u.k. and globally to resolve it. it is imperative for financial stability. we will announce next week an agreement on total loss absorbing capacity, global agreement. you have seen the u.s. announcements. there is a global agreement we have secured which will be recommended to g-20 leaders. this is the defining moment in unlocking -- ending too big to fail for big institutions. you would then have to go through several years where banks reorganize capital structure and business models to be consistent with that.

it is when you get to the end of that process in the next few years you are in a position where i can say we think we can resolve one of these institutions. we recognize that. with respect to your specific question, we are very conscious at the bank of england we have a banking sector that is almost five times gdp. we have a financial sector on the road to being 10-15 times gdp as a whole. we need to have that organized in a way that it is resilient and so individual institutions, whether banks, insurance companies, hedge funds, asset managers, etc., can fail in an orderly fashion. including banks that are bigger than our own gdp. we are putting in place all the tools necessary in order for that to be the case. if i can flag something for you, which is next week we are having a public event. i will let you ask. what it is relevant to this because one aspect of the

so-called reform is a recognition that the progress made for institutions and markets so this economy, this country, society, can confidently sustain the financial sector of this site if it chooses. >> on the question of public credibility, i wonder how much it came down to issues of liquidity. in the open forum, you talk about it making capitalism work for people effectively. people are very angry about banks. banks seem to be providing slightly less liquidity now. liquidity is moving towards non-banks.

is that good news or bad news? >> it is good news. it is good news depending on how it is organized. let me say a couple of things to we have seen these events since the taper tantrum of 2014. i have now seen so many events i cannot keep track. you have difficult phase in markets, including some formerly liquid markets. that is difficult. we need to get to the bottom of why this is happening, the role of changing the market structure, etc. if you step back and look what is happened with the world's largest financial institutions, the dog that has not barked in these episodes has been any distress at any of these institutions. what has happened is within a few days, those institutions have come back into the markets. they have dampened illiquidity

or spikes in volatility in market as opposed to amplify that, which is what they did in the run-up and during the crisis. some of these reforms are having their intended impact. we have to get to the bottom. that is one of the issues we want to talk about next week, which is a more bloomberg-type issue that your core client base really cares about these markets being effective and how they function, as they should. the question we are putting on the table for all to discuss is, which of the reforms have worked? what is contradictory? is it coherent as a whole? what have we missed? etc. there is a broader set of questions in the u.k. and beyond on how well markets are serving the real economy.

a lot of the diversification you reference are banks pulling back and non-bank actors coming in. that will ultimately serve the real economy better. we will have a more diversified system. there is a third set of questions which i alluded to and i would use the terms of social license. it is one thing for me to sit here and say we have all the technicalities worked out and these institutions we can rely on in the u.k. it is another question to say whether people want a financial sector of this size, whether they recognize the economic benefits of them. connected to that is whether they view those markets as being fairly organized and accountable. >> how much progress do you think you have made? there's a huge amount of anger at the banks. you are relatively popular. there has been an attempt by you to try to explain this. it does not seem to have gotten through in terms of the way they look at banks. >> it is understandable the

skepticism people have given what they have lived through. a lot of progress has been made on making the bank stronger. a lot of progress has been made. now it has to be incremented. the key issue is about conduct. i think what angers people and what is being tackled now is individual is possibility has not been there. we have seen big fines against institutions but relatively few individuals. >> no bankers have gone to jail. >> it is broader than that. it is the overall culture and codes and behavior of a broader set of people in the industry. we have made sweeping changes. i would underscore in conjunction with banks and market participants. we are in the process of rewriting the codes of conduct in these industries. we are connecting, as regulators, those codes and behaviors to individual is possibility and accountability

so if there institutions, if the senior managers don't behave, it is not just the responsibility of the trader that their boss and their boss's boss because they have not put in place things. that will make a bigger difference, in my view, much more in the spirit of the way london operates. it will make a bigger difference than having a lot of hard and fast regulations and enforcement around those regulations. >> back on the subject of the unreliable boyfriend, you have tried to communicate to people about possible interest rate rises, all these things. yet we are still flirting with the idea of interest rates. do you think there was no alternative looking back? do you have any regrets? >> i think the forward guidance initially was very much about early stages of the recovery and the minimum conditions required before we would even consider raising interest rates. if you look at the historical function of the bank of england, strength of the purchasing managers' indices and growth,

banks were able to raise rates three times during that time. it was revealed in terms of outcomes that would not be the right thing. it was to see what the attraction is and the underlying inflation dynamics were. that is a sensible thing to do and i think it gave people confidence to continue to invest. subsequent to that, we have given interest about the path of interest rates, limited and gradual. we have repeated it so many times it is part of the furniture now. that is a good thing because that was a call we made in december of 2013. two years ago we made that call. now, it is accepted. it has been consistent. recently the challenge we have been facing is what is the right timing of starting the process of limited, gradual rate increases. this economy has been making some progress in the judgment of the committee, including myself. it has not made enough progress to start that process.

at some point, that will be there. would i rather have the majority

of the british people thinking rates are likely to go up in the next year, which is the case today? yes, i would because that is reasonably prudent behavior given the progress this economy is making, given the likely path of rates. do i want businesses to think when rates go up it is not going to be the old rate cycle, very sharp increases, rapid? i would like them to think that as well because they can plan accordingly. at some point, rates are going to move. that is not today, unfortunately. this will not top your news. >> two personal questions. do you have any ambitions to see that through, to stay beyond five years? do you have any reaction to the events in canada? in the recent election? >> on the second, i would congratulate prime minister trudeau and the cabinet. i look forward to working with the new finance minister. in the fsb role, we have a tangential role in the upcoming discussions in paris which brings it back to bloomberg. it will potentially set up a market-based role on climate change. i am not even halfway into my

five years enough to answer that. >> thank you very much for speaking with me. >> my pleasure. ♪

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