bank rate. monetary policy affects inflation with a long and somewhat variable lag and there is little the mpc can do to offset unanticipated movements in near - term inflation. instead, we have to look at inflation prospects two or three years ahead. but it is in the nature of asset prices, including house prices, that one can say rather little about their likely direction of movement that far ahead. most of the time, the best projection of asset prices at that horizon is for them to be broadly flat. consequently, i suspect that our policy choices would not have been radically different had we been tasked with targeting an inflation measure that included a measure of owneroccupied housing costs. finally, there is something of a logical error in moving from the indubitably correct observation that successful inflation targeting is insufficient to guarantee either macroeconomic stability or financial stability to the conclusion that monetary policy should in addition, or instead, be focussed on some other objective. there is a real danger in overburdening monetary policy if it is expected to achieve both price stability and financial stability simultaneously. with two objectives, one needs two independent means of achieving them. the assignment of instruments to targets then revolves around which instrument is most effective at achieving which objective. though loose monetary policy, particularly in the united states during 2001 – 5, arguably contributed to the build - up of the financial imbalances, it was but one of many causes, including a plethora of failings within financial institutions. these include : inadequate care in the extension of loans to risky individuals, when those loans are then sold on ; the inappropriate use of off - balance - sheet vehicles to circumvent capital requirements ; reward packages that encouraged an undue focus on short - term returns ; excessive complexity and opacity in some asset - backed securities ; and distorted incentives facing ratings agencies. although regulators and supervisors conspicuously failed to address these issues during the run - up to the crisis, prudential regulation and supervision should surely be the first line of defence, as they can be focussed directly on the source of the problem. regulatory policies have a comparative advantage in combating excesses in financial markets. by contrast, inflation is, in the long run, a monetary phenomenon, so it is more naturally suited to the pursuit of price stability. beefing up the regulatory regime so it is better suited to preventing the re - emergence of financial excesses is very much work in progress. there are sound arguments

and the spread between them 1. that suggests gilt yields are lower as a result of the programme by a total of around one percentage point. moreover, since the programme began, investment - grade corporate bond yields have fallen by almost four percentage points, equity prices have recouped half their the impact is measured by the change over two days in the average 5 to 25 year ( zero coupon ) gilt spot rate. the event dates are the publication of the february 2009 inflation report and the associated press conference, which was taken to suggest a policy of quantitative easing was imminent ; the decision at the march mpc meeting to use the asset purchase facility as a monetary policy tool for initial asset purchases of £75bn ; and the subsequent extensions of planned purchases to £125bn in may, to £175bn in august and to £200bn in november. losses and capital market issuance has been unusually strong. finally, nominal demand growth recovered to an annualised rate of around 4 % in the second half of last year. although we cannot be sure what would have happened without our asset purchases, these movements do at least go in the expected direction 2. some commentators have pointed to the weakness in bank lending and argued that this shows that quantitative easing has not worked. while the substantial increase in bank deposits and bank reserves as a result of the asset purchase programme could indeed encourage banks to extend more credit, such an effect was always likely to be quite weak, as at the current juncture banks are seeking to repair their balance sheets and to de - leverage. rather, the objective of quantitative easing is to work around an impaired banking system by stimulating activity in the capital markets. of course, some businesses, especially small and medium - sized enterprises, will not find it possible to access funds through the capital markets. but the right response is then to get the banks back into a position to lend normally as soon as possible. the array of measures introduced by the government to support the banking system – injections of new capital, insurance against losses on toxic assets, guarantees on bank debt – plus the bank ’ s special liquidity scheme, which allows banks to swap illiquid mortgage - backed securities for liquid treasury bills, have all been aimed at that objective. the second reason to be hopeful lies in the substantial depreciation of the sterling effective exchange rate, which has fallen by around a quarter since the middle of 2007. prior to that, the mpc had already drawn attention to the need to re