committee is playing in addressing the challenges posed by the global economic downturn. 2. unconventional policy measures the mpc responded to the marked deterioration in the economic outlook with an aggressive easing in monetary policy. we reduced bank rate from 5 % to an historic low of just 0. 5 % in a matter of months. moreover, at our policy meeting earlier this month, the committee agreed to finance £75 billion of asset purchases by the issuance of central bank reserves, in order to boost the supply of money and improve the functioning of corporate credit markets. the purchase ( and sale ) of assets by central banks is nothing new ; central banks have always implemented monetary policy by changing the size and composition of their balance sheets. nor, importantly, has the objective of monetary policy changed, which is to hit the government ’ s 2 % target for cpi inflation. what is different, however, is the range of assets being purchased by the bank and the scale of those purchases. given those changes, i want to explain the rationale for large scale asset purchases in the current economic climate. in doing so, i will address two key questions. first, how will asset purchases help us meet the inflation target? and second, how will we monitor the progress of the policy and assess its effectiveness? how will asset purchases help us to meet the inflation target? the objective of the asset purchase programme is to boost nominal spending in order to hit the inflation target. the tightening in the availability of credit and the collapse in confidence has led to a sharp slowing in the growth of nominal demand. the four - quarter growth rate of nominal gdp sank to a record low in the final quarter of last year. the weakness in nominal spending has been accompanied by a sharp slowdown in the growth of bank lending to firms and households and in the growth of money holdings of the non - financial sector. at our policy meeting earlier this month, the committee judged that without the additional stimulus provided by the asset purchase programme, the growth of nominal spending would be insufficient to meet the inflation objective. the mpc instructed the bank to use the additional reserves to purchase two types of assets : gilts and high - quality corporate debt. this twin - track approach allows for asset purchases to stimulate nominal spending in a variety of different ways. such a pragmatic strategy seems entirely sensible given that this in the first time these unconventional tools have been used in the uk. i find it helpful to summarise the different mechanisms through which asset purchases may boost nominal

the impact of the financial crisis would be largely restricted to the exclusive confines of the square mile and wall street was dispelled once and for all. households and businesses cut back on their spending as it became increasingly apparent that the effects of the financial crisis on the real economy were likely to be deeper and more widespread than previously envisaged. the impact of the tightening in the supply of bank credit and of the widespread collapse of confidence was compounded by developments in the supply of trade credit. in previous recessions, many large businesses in the uk were able to support smaller companies by reducing payment times to companies further up the supply chain and by extending credit to those further down. but pressures on corporate cash flows and the reduced availability of bank credit may have limited the scope for larger companies to behave in this way in this downturn. the monetary policy committee, via its network of regional agents, is monitoring closely developments in the demand for and availability of trade credit. the reduction in the availability of trade credit has been accompanied by a tightening in the supply of credit insurance. this is at a time when the demand for such insurance is at its highest. similarly, heightened uncertainty about the global environment has increased the demand for letters of credit from uk exporters. these developments are understandable and predictable : the economic environment has deteriorated markedly and as insurers you need to protect yourselves against future losses. there is a limit to how much insurance premiums can be raised before they exceed the profit margin associated with a particular transaction. higher prices can have the same effect as the complete withdrawal of supply. i know that members of the abi are working hard with government and with business to agree how best to meet these challenges. it is vital for the long - term success of both your industry and our economy as a whole that a workable solution is found. where next for the uk economy? the monetary policy committee set out its latest economic outlook in the february inflation report. that report went to great pains to stress the considerable uncertainty surrounding the prospects for the economy. nobody can predict with any certainty how the uk economy, or indeed the world economy, is likely to fare over the next year or so. so beware of anyone that suggests otherwise. with that warning in mind, let me outline my central economic outlook, which is broadly similar to that described in the february report. near - term prospects are bleak. output is likely to contract further in the first half of this year, as a weakening labour market and