financial markets. as a result, asset prices of all kinds have been volatile. so far the consequences of turbulence in financial markets have been largely restricted to securities markets, especially in the united states. these markets are somewhat less important in the provision of corporate finance in the uk, although if the reduction in security market issuance were to persist this could affect the ability of the personal and corporate sectors to obtain finance from both banks and the capital market. as yet lending by uk banks has not been affected to any significant extent. the monetary statistics published yesterday show that total bank credit grew by 0. 7 % in september, leaving the 12 - month growth unchanged at 8. 7 %. the mpc will watch carefully for any signs of a credit crunch developing. the bank monitors indicators of credit conditions in the financial markets on a daily basis. and the mpc has asked the bank ’ s regional agents to conduct a survey of borrowing conditions faced by businesses around the country in time for the mpc meeting in november. the international situation is, of course, only one of the factors that influence interest rates. in the august inflation report, the mpc made clear that it expected - indeed wanted - the growth of domestic demand to continue to slow throughout this year and into next. a slowdown is necessary because, as the restraining effects on retail prices from the rise in sterling start to wear off, domestically generated inflation must fall if the inflation target is to be met. the latest data from the office for national statistics show that domestic demand and output have been growing broadly in line with the desired path. but survey data show a markedly weaker picture for output and orders, both over recent months and, more importantly, looking ahead. the lags with which changes in monetary policy affect the economy mean that the mpc can not wait to find out whether the surveys provide an accurate prediction before it sets policy. each month the mpc balances the information contained in official statistics, surveys, anecdote and the impressions of conditions in industry relayed to us by our network of regional agents. an issue of considerable importance is the state of the labour market. the august inflation report argued that the outlook for inflation depended critically upon the labour market and, in particular, on the behaviour of earnings. at the time of that report the latest figure for earnings growth was 5. 4 %. given historical levels of productivity growth of around 2 %, this level of earnings growth was, on the face of it, incompatible in the

about $ 10 bn in 1997. that retrenchment has continued during 1998. why does this matter? in the absence of other sources of finance, a reduction in net capital inflows has to be matched by a corresponding improvement in the current accounts of the emerging market economies. to achieve such a rapid turn - round in the current account required significant depreciations of their currencies and deep recessions. the counterpart to the improvement in the current account of the countries affected is a larger trade deficit, or smaller trade surplus, in the rest of the world. the uk is not immune to this change in trade balances, and the impact of the asian crisis on our exports has, of course, been compounded by the rise in sterling since 1996. if the asian crisis affected most a relatively young, and only temporarily wounded, tiger, the recent turbulence was heralded by the growl of a much older, more grizzly, bear. the announcement by the russian government on 17 august of its intention to restructure payments on its domestic bonds led to a fundamental reappraisal of international investors ’ willingness to bear risk. the reappraisal caused the average cost of capital to emerging market economies - measured by interest rates on their bonds - to rise to levels not seen since the immediate aftermath of the mexican crisis in 1995. this increase in cost is likely to lead to a further reduction in net capital flows to emerging markets and so magnify the adverse trade effect faced by the industrialised world. second, the greater aversion to risk has led to falls in equity prices throughout the industrialised world. the ft / s & p world stock market price index has fallen by nearly 12 % since its peak three months ago. in the uk, the ftse all - share fell by nearly 20 % over the same period. the fall in equity prices is likely to lead to both lower consumption growth, as consumers adjust to the fall in net wealth, and lower investment growth, as firms react to the higher cost of capital. third, the heightened aversion of financial institutions to risk has led to fears of a “ credit crunch ”. a credit crunch occurs when lending institutions try to reduce their exposure to risk and, in so doing, the size of their balance sheets. in recent weeks, the desire of these institutions to reduce the scale of their leveraging and move to less risky portfolios has led to a reduction in the amount of capital available to support liquid