. this spills over into consumption and investment, and finally into economic growth. this mechanism is also known as the “ financial accelerator ” a final monetary policy transmission channel involving banks i wish to allude to is the risktaking channel. low interest rates and abundant liquidity may decrease risk aversion and encourage risky investments, as well as leading to laxer credit standards. this raises the supply of bank loans and can have a significant impact on credit growth. the evolution of credit volumes so much for the theoretical background. let me now move on to how corporate credit volumes have actually evolved in luxembourg, and how those developments tie in with those at the euro area level. my intention is not to identify the workings of the different monetary policy transmission channels in luxembourg – this would be a herculean undertaking! however, it is helpful to keep the theoretical underpinnings in mind when looking at the actual credit developments and the potential underlying explanatory factors. as you can see in the chart, the underlying trend developments in luxembourg and at the euro area level coincide, despite the higher volatility in the luxembourg data. most notably, corporate credit dynamics rose continuously up until 2008, when they began to unwind rather rapidly, first in the euro area at large and shortly thereafter also in luxembourg. the pace and magnitude of the decline in the loan dynamics are particularly worrying, with below or near zero growth rates in the third quarter 2009. it is worth emphasising that roughly one year ago, in september 2008, the annual progression of corporate loan volumes in luxembourg peaked at 54 %! as for credit to households, the annual progression of mortgage lending has been on a downward trend since 2006, long before the crisis. however, this downward trend accelerated considerably and the annual growth rate recently stabilised just under 6 %. consumer credit has been progressing steadily since 2008, which represents a trend inversion compared to the preceding years. all in all, household loan dynamics have been much more benign than corporate credit developments. this raises the question as to how and why the corporate credit cycle could take such a rapid u - turn. while the obvious answer is that banks refuse to grant loans in the wake of the financial crisis, this is but one side of the coin. disentangling demand and supply indeed, the bank lending survey or bls – a euro area - wide bank survey on quarterly credit developments – strongly indicates that the sharp slowdown in corporate credit expansion is owing to both supply - and demand -

mervyn king : monetary policy developments speech by mr mervyn king, governor of the bank of england, to the birmingham chamber of commerce annual banquet, birmingham, 23 january 2007. * * * lord mayor, lady mayoress, president, distinguished guests, ladies and gentlemen, two weeks ago your chamber of commerce called on the bank of england to take manufacturing more seriously when it sets interest rates. in arguing against an interest rate rise, the birmingham chamber said, “ we would urge the bank of england to once again consider the effects this will have on the beleaguered manufacturing sector ”. it will not have escaped your attention that bank rate did rise in january and has now increased by 75 basis points since the beginning of august. so tonight i want to explain why the monetary policy committee took that action, and why the bank believes that the control of inflation is essential for the success of birmingham – and all british – manufacturing. last week we learnt that inflation, as measured by the consumer prices index, was 3 % in december, the highest level since the monetary policy committee was set up almost ten years ago. if it rises by one further decimal point to 3. 1 %, i shall have to write an open letter to the chancellor explaining why inflation has risen to more than one percentage point above the target of 2 %, and what measures the committee are taking to bring inflation back to target. rpi inflation has risen to 4. 4 %, the highest rate since december 1991. and rpix inflation – the target which governed our decisions until december 2003 – has risen to 3. 8 %, which would have triggered a letter under the old target. in 1997, i suggested that “ given past experience of inflation volatility, it is likely, even allowing for the change in policy regime, that the mpc will have many opportunities to restore the lost art of letter writing to british life ”. it is really very surprising that no opportunity has yet arisen. as i stressed back then, it is important to understand – and many commentators seem to misunderstand – that the inflation target is not a range of 1 - 3 %, but a target of 2 % at which the monetary policy committee continually aims. so an inflation rate of 3. 1 % is simply a trigger for a public explanation of why inflation has risen above target and what the committee proposes to do about it. letter writing is a key part of the accountability provisions of the monetary policy framework created in 1997, and