of losses for banks and a further tightening of credit conditions. the adjustment which not only the british but the world economy is experiencing is necessary as the imbalances, between spending and saving and between domestic demand and trade, unwind. as part of a longer - run rebalancing of the uk economy, an increase in our national saving rate, both private and public, is necessary. the low level of national saving is apparent from the current account deficit – our new net borrowing from overseas – which in the third quarter of last year was, relative to gdp, the biggest in the past fifty years and the largest in the g7. it is possible to run a current account deficit for a considerable period. australia, for example, has done so in every year since 1974. but our own position is becoming more difficult. for some years we have been able to finance current account deficits by borrowing, often through banks, at unusually low interest rates on world capital markets. such borrowing is now becoming more expensive. unless we spend less and save more, our current account position will deteriorate. if we are to raise our national saving rate without overall demand, output and employment suffering in the medium term, we will need to export more and import less. such a rebalancing is helped by the fall in sterling ’ s effective exchange rate. sterling has fallen, against a trade - weighted basket of currencies by almost 10 % since august. and financial markets are pricing in a significant probability of a further decline in the exchange rate during this year. a lower average level of the exchange rate can, by supporting overall economic activity, help protect us from the worst effects of the wind blowing across the atlantic. but, by pushing up import prices, it will exacerbate the impact of the other wind now buffeting the uk economy, which comes from the east – the inflationary effect of higher energy and food prices. strong growth of demand, particularly from china, india and other emerging markets in asia, has been a key driver of the sustained rises in commodity prices over recent years, most notably oil prices. inflation has picked up in the industrialised world. it is now 3. 1 % in the euro area and 4. 1 % in the united states. and although consumer price inflation here is close to target at 2. 1 %, three developments now threaten to push it significantly above target this year. first, oil prices are around $ 90 a barrel, although they

our encouragement in september to ‘ welcome and support ’ harmonised market conventions on the basis proposed by the market associations. we also welcome the emi council ’ s decision in september to prepare for the computation by the escb of an effective overnight reference rate for the euro area. there remains however a good deal to be done everywhere - - in co - ordinating price sources, for example, as methods of redenomination. but in all of these respects london is well up with the game. conclusion mr. chairman, it is sometimes suggested that a perceived threat to its activity if we were “ out ” will cause the city to press for early uk membership of emu, and that this will be an important factor in the government ’ s decision. i am bound to say that i see very little sign of this. certainly there are those in the city who advocate our early participation, but there are equally those who are more hesitant - - just as opinions are divided elsewhere within the country. but for the most part, my impression is that city attitudes to emu, whether for or against, reflect a broader assessment of the respective pros and cons for the country as a whole rather than strong views about the implications for the city in particular. on the whole i find that city opinion is relatively optimistic about its future prospects, “ in ” or “ out ”. and, provided we do indeed operate within a co - operative framework, and provided we are indeed well prepared, the city has good reason to be optimistic.