were reduced. in concluding this section on debt, i should say that i am moderately encouraged by the present trends. the rates of increase in domestic debt have recently slowed, and continue to do so [ chart 7 ]. i do take some comfort from this adjustment, which now seems to be in train. in policy terms i would like it to continue so that leverage continues to adjust downward as incomes rise. and if there were signs of a reacceleration in debt per capita, it would once again weigh on my mind, and perhaps, if i were still there, on my policy decision. chart 7 : annual growth rate of household debt per cent unsecured borrowing total borrowing secured borrowing 94 95 96 97 98 99 00 01 02 03 04 05 source : bank of england labour market throughout my time on the mpc we have been thinking about the reasons behind what seems to be a remarkably benign labour market environment with little pressure for higher wages, and yet with levels of unemployment that are at their lowest since the mid - 1970s. this situation continues, and there are two dimensions, which mean that in assessing the size of the market we can no longer think of the labour market being constrained by the uk as a geographic entity. the first dimension concerns migration. for a while now on our regular visits to the different regions in the uk, mpc members have been struck by the extent to which migrant labour is active in a number of sectors of the economy, particularly people from the eu accession countries such as poland. in my own case the reality of this was reinforced by what i heard during a visit to poland earlier this year. furthermore, reports which we regularly receive from the bank ’ s agents have painted a sustained picture of a significant increase in supply to the labour market, which did not always show up in the official statistics. the mpc began to think about this some time ago, and although we couldn ’ t see it in the statistics, we took account of what we thought was happening in our policy discussions. so if we have already allowed for this increase in migrant workers, a key question is whether the rate of influx will continue and, if it does, what will the net effect be on demand and supply in the economy? the uk has been in the forefront of accepting citizens of the accession 8 countries, but other european countries are due to remove barriers to entry. the exact timing of the relaxation of restrictions is unclear, but once it occurs we could find that this has an impact on

##sposable income for other things. whilst the mpc takes comfort from the observation that so far inflation expectations and earnings growth have not risen, it is nonetheless possible that this could lead to demands for higher wages. such demand, if granted, could be inflationary and even result ultimately in increased unemployment. the likelihood of this happening may be slight and there is no real sign of expectations presently becoming dislodged in the uk. and it is striking that although the effects of oil may have some impact in today ’ s modest slowdown of consumption, that we have nonetheless managed to weather a significant price increase with so little disruption to the economy. quite different from the late 1970s. but i think it is still too early to relax in relation to inflation expectations, and i think that the subject of oil will feature as a significant issue for some time to come in the monetary policy arena. debt there has been much comment on the build up of domestic debt in recent years. in aggregate, the ratio of household debt to disposable income is now over 150 %, having risen from around 100 % in the late 1990s. this upward trend is not unique to the uk, although the debt - income ratio here is a little higher than in most countries [ chart : 3 ]. chart 3 : debt - income ratio across countries france germany netherlands spain us uk australia per cent source : data from eurostat, the federal reserve and data sent direct from reserve bank of australia. there are a number of key reasons for the increase, coming from changes both in demand and supply. supply side factors include : a liberalised financial market place with new categories of lender and greater competition ; new technology, in particular the widespread adoption of credit scoring techniques and data sharing that have given confidence to lenders in granting unsecured loans ; and greater securitisation, enabling firms to write more business by diversifying and laying off the risk onto third parties without burdening their own balance sheets. on the demand side, there appears to have been a change in social attitudes towards debt that has made people more willing to borrow. this might in part be due to low inflation and nominal interest rates that have helped to keep the cost of debt payments down particularly in interest terms [ chart 4 ], while greater macroeconomic stability and low unemployment have given households the confidence to borrow and lowered the risk to lenders. there has also been a decline in real interest rates that has reflected many factors, including to some degree the