up and others, notably shorter term lending in money markets, have become much more expensive ( chart 4 ). what is more, all these effects have lasted longer than expected and seem set to continue for some time. banks have responded by hoarding liquidity and trying to reduce their leverage by raising new capital ( not without difficulty in some cases ) and by constraining the growth of lending. one direct effect has been a marked tightening of credit conditions over the past year ( chart 5 ), which seems still to be underway. that in turn is pushing down asset prices and demand. our forecasts and our policy decisions have reflected our best assessment of the likely impact of this feedback. we brought down interest rates earlier in the year to cushion the impact of the change in bank behaviour. in effect we have relied on the credit squeeze in large measure to produce the slowdown we consider necessary. but we are fully aware of the risk that the squeeze on banks and the feedback to the economy could prove more powerful than expected. that risk does not just arise from the drama of the last week or two. we will continue to work for the return of calmer financial markets. but we should not rely on that to reverse quickly the broader macroeconomic slowdown that is underway. indeed there are still risks to the downside and i thought it might be useful to spell out how they feed through the economy and therefore make plain what indicators i will be focusing on in the next few months. any contraction in lending to the real economy can amplify the slowdown in demand ( chart 6 ). increases in retail lending rates for those who can still get access to credit discourage spending. increases in credit rationing can have a more dramatic impact. if those households and companies are unable to tap other sources of finance, then their spending will have to fall back in line with income. spending on high cost durable goods – such as purchases of cars and white goods by households and machines by companies – are likely to be particularly affected. and the contraction in mortgage lending pushes down house prices, further eroding the value of the collateral against which banks ’ loans are secured. tighter credit conditions raise income gearing, forcing households and companies to devote a larger share of their income to servicing debt. and as the impact of those tighter credit conditions bite on the economy, income is likely to be squeezed and that at the same time as real incomes are being affected by higher food and energy prices. the slowdown in demand will

economic effects of the financial crisis took hold, average deposit rates did not fall by as much, and so the effective cost of deposits moved from being somewhat below to somewhat above bank rate, but without being fully offset in lending rates. we can now answer the question what has happened to these relationships as the monetary policy committee has raised bank rate back up into the range that was more typical before the financial crisis? the answer is that the old relationship whereby deposit rates averaged below rather than above bank rate has been re - established. nims are currently around where they were in late 2005, immediately before the financial crisis at 3. 2 %. on the face of it, more normal conditions have returned. but let me end this section with two comments on the current situation. first, this reversion to past patterns does imply that overall deposit rates have risen by somewhat less than bank rate. bank rate has risen by 5. 15 % since we started to increase it in december 2021, and on average overall effective rates on interest - bearing deposits have risen by 2. 5 percentage points. that is not, however, the end of the story, because more has gone on under the surface. if we split deposits into fixed - term and instant access or sight deposits, we see 4 / 9 bis - central bankers'speeches two very different parts to the story. on average, fixed term deposit rates have risen by 3. 7 percentage points since december 2021. but the effective rates on interest - bearing sight deposits have risen by less, on average by 2. 1 percentage points. why has this happened, and what is the consequence of it? regulation plays a part here. one of the important regulatory responses to the financial crisis was to create a liquidity regulation framework, including the net stable funding ratio, which incentivises banks to take relatively more term deposits which cannot run as quickly. this was a deliberate choice to increase stability. my conclusion is that the incentive to take more stable deposits has been carried through into pricing. the second conclusion, again consistent with the incentives, is that there has been a notable shift from holding sight to holding term deposits. the evidence indicates that the share of deposits held in time deposits has increased by 8 percentage points since the start of the tightening cycle. let me finish this section with a short answer to the question, what happens next for net interest margins, and thus for returns to banks? it depends no doubt on quite a lot of things. but the answer to what