(2017), “Watching the Watchers”, speech at the GARP 18th Annual Risk Management Convention, New York. Available at https://www.bankofengland.co.uk//media/boe/files/speech/2017/watching-the-watchers-forward-looking-assessment-and-challenge-of-a-central-banks-own-financialrisk.pdf. 24 The details of the capital framework are contained in a Memorandum of Understanding between the two institutions, available at https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/718481/The_Financial_Relationship_ between_the_Treasury_and_the_Bank_of_England_-_MoU_web.pdf. 25 See Carney, M. (2018), “New Economy, New Finance, New Bank”, Mansion House Speech 2018, available at https://www.bankofengland.co.uk/-/media/boe/files/speech/2018/new-economy-new-finance-new-bank-speech-by-mark-carney.pdf. 8  All speeches are available online at www.bankofengland.co.uk/speeches  8  Where are we heading? Where does all this leave policy and the balance sheet through which it is implemented? In August 2018 the MPC voted to raise Bank Rate from 0.5% to 0.75%. That was based on our Inflation Report forecast, which showed that absent an increase in Bank Rate, the economy was likely to move into excess demand, and that the resulting wage pressures would push inflation above our 2% target. In September we then voted to leave Bank Rate unchanged at 0.75%. And looking ahead we expect that, if the economy continues to evolve, as it has done so far, broadly in line with our August forecast, then further limited and gradual rises in Bank Rate will be appropriate to return inflation sustainably to the target. As well as being the collective view of the committee, this is also my personal view, which is why I voted for an increase in Bank Rate in August. The signal I take from the labour market indicators is one of labour market tightness and rising pay pressures, which I expect to support inflation in the medium term.

Relative to money spending, central bank money supply is at its highest levels in the 15-year history of the European Central Bank, the 100-year history of the US Federal Reserve, the 131-year history of the Bank of Japan and the 319-year history of the Bank of England. Accompanying these monetary policy changes has been a marked shift in regulatory philosophy. Since the crisis, financial regulation has become explicitly macro-prudential [Morris and Shin, 2008; Bank of England, 2011; Hanson et al, 2011]. This is an expression much-used, but generally little-understood. In a nutshell, it means that policymakers have begun using prudential means to meet macro-economic ends. Those macro-economic ends include tempering swings in credit and leverage – the classic credit cycle. The credit cycle is a long-established feature of the financial landscape [Aikman et al, 2014]. Chart 1 shows its pattern in the UK over the past 130 years or so. The credit cycle is every bit as regular as the business cycle. But it differs from the business cycle in two critical respects: its amplitude is at least twice as large and its duration at least twice as long. Both are important for the design of macro-prudential policy regimes. The larger amplitude of the credit cycle is one reason why credit booms have, more often than not historically, resulted in banking crises (Table 1). Because financial crises cause large and long-lived disruption to the economy, this suggests a strong empirical link between credit cycles and macroeconomic destabilisation.