past rises in bank rate will need to slow domestic demand. and inflation expectations will need to fall back in line with the 2 % target. the monetary policy committee will be watching closely indicators of capacity pressures, pricing intentions and inflation expectations. if these indicators remain elevated, the mpc may need to take further action. there is no simple or self - evident answer to the question of what path of interest rates will be necessary to bring inflation back to the 2 % target and keep it there. by now you must be asking your own “ why? ” question – why is he keeping us from such a splendid dinner? so i will not detain you. i have tried to explain this evening why interest rates have gone up. each month we try to spot the shocks, evaluate their implications for inflation, and set interest rates to meet the 2 % target. we do that to provide a backdrop of macroeconomic stability so that you can focus on the really important questions for your businesses. why is that product selling better than this one? why is my competitor changing his prices? and, most important, why did the wallabies run the welsh defence ragged in brisbane, where wales lost by almost as big a margin as england did to south africa? i don ’ t have the answers to those questions. but, of one thing i can assure you, in terms of the economy we will never stop asking “ why? ”

. like the us in the late 1990s, we have experienced our own positive “ supply shock ” in the form of a significant wave of inward migration, especially from the accession states, of people looking for work. that has reduced the risk of a rising demand for labour leading to faster wage inflation. but despite greater availability of labour, businesses have not over the past year expanded employment sufficiently to prevent stronger demand from increasing capacity pressures. the bank ’ s agents report that capacity utilisation is now at an unusually high level. these pressures encourage businesses to raise prices. and that is exactly what the business surveys suggest has been happening. a position in which growth is above its long - run average and businesses are already operating with pressures on capacity is unlikely to be one without inflationary risks. that is one reason why the monetary policy committee has raised interest rates over the past year. the second question is about money and credit. the quantities of broad money and bank lending are now around 14 % higher than a year ago – rates of growth last seen in 1990 when inflation was more than 8 %. but again, we should be cautious. if credit becomes cheaper and more widely available, thereby increasing the stock of money ( a “ money supply shock ” ), households and businesses will increase their spending on goods and services and on assets, both financial and real, and this will push up on inflation. but if they wish to hold more money in their portfolios – a “ money demand shock ” – then the extra money will have few, if any, implications for inflation. so why have money and credit been growing so rapidly? given the pace of their expansion, it is likely that there has been both a demand and a supply shock. the supply shock is that banks have become increasingly willing to provide finance. credit has been readily available and the spread between interest rates paid by households and businesses and interest rates available in the money market has fallen. that is one factor behind the rapid growth of business investment spending over the past year. in light of the greater availability of credit, any person or family that borrows at a variable rate should recognise that the interest rate they will pay in the future may vary. obvious though the point may seem, it is unwise to borrow so much that the repayments are affordable only if interest rates remain at their initial levels. indeed, wider and cheaper availability of credit was a “ shock ” that boosted spending, and so was a further reason why the monetary policy committee raised interest rates