as you know, a lively debate among the members of the mpc as to when that point will come. the committee is watching extremely carefully for any signs of a pickup in domestically generated inflation and it will take action as soon as it is appropriate to do so. so far, subdued rates of increase in average earnings, as well as remarkably – some might say disturbingly – low growth rates of broad money have provided strong signals that inflation will fall back in due course. banks are still contracting balance sheets and reducing leverage. spreads between bank rate and the interest rates charged to many borrowers remain at unprecedentedly high levels, if indeed borrowers are able to access credit at all. when conditions in the banking sector return to something closer to normal, those spreads will contract and the rate at which that takes place will have an important influence on the speed at which bank rate will rise. uncertainty inevitably surrounds both the speed of the rebalancing and the impact of today ’ s consumer price inflation on tomorrow ’ s domestically generated inflation. so it is simply impossible to know now at what point monetary tightening will begin. let me turn now to the bank ’ s new financial policy committee ( fpc ). its creation is a response to the lesson that monetary policy cannot target stability of both prices and the financial system. before 2007, the massive build - up of leverage in the banking system, accompanied by a rapid growth of broad money, led to an expansion of bank balance sheets and a rise in financial fragility, but not inflation. in most industrialised countries, central banks successfully set short - term interest rates to combine steady growth of output with low and stable inflation. but this did not prevent the emergence of unsustainable patterns of demand and unstable financial systems. the fpc aims to deal with that problem by expanding the range of instruments available to the authorities. the fpc has been hard at work preparing for our first policy meeting tomorrow and our first report will be published on 24 june. the other voting members of the committee – adair turner, hector sants, michael cohrs, don kohn, alastair clark, and my bank colleagues paul tucker, charlie bean, paul fisher, and andrew haldane – make a formidable group with great experience. so what will we be doing? in devising new macro - prudential policy instruments, there is inevitably a degree of learning by doing. the fpc will be both doing and learning. in the wake of

mervyn king : monetary policy developments speech by mr mervyn king, governor of the bank of england, at the lord mayor ’ s banquet for bankers and merchants of the city of london, mansion house, 15 june 2011. * * * my lord mayor, mr chancellor, my lords, ladies and gentlemen : in recent years, i have set the mansion house audience a numerical examination. after a pleasant dinner, you will not want to listen to more numbers. a more literary style is appropriate. so my question to you tonight is : which aspect of financial regulation is most deserving of the adjective “ tragic ”? the answer comes later. a year ago, we met in the wake of a major sovereign debt crisis in greece with market nervousness about how far that might spread. since then, this crisis of external indebtedness has consumed ireland and now portugal, as well as greece. current account imbalances in the euro area remain large, should concern us all, and will certainly affect us all. inexorably, the world economy is adjusting from an unstable disequilibrium to a new equilibrium. trade imbalances and the associated levels of borrowing proved unsustainable. in more biblical language, failure to tackle the imbalances during the seven years of plenty before 2007 threatens seven lean years thereafter for at least part of the world economy. after a deep - seated banking crisis, now transmuted into a sovereign debt crisis, the need to reduce debt as the world adjusts to a new equilibrium pattern of spending and trade will mean only a gradual recovery in many advanced economies. storms from the world economy are likely to stir up the waters through which the uk economy must pass as it too adjusts to a new equilibrium with lower levels of debt and a rebalancing from domestic to external demand. so, my lord mayor, there is no shortage of challenges at home. consumer price inflation has risen to 4½ %, and further large rises in utility prices are expected. output has probably grown by only around 1 % or so over the past year. our banking system faces a need, over time, to build higher levels of capital and find new sources of domestic funding. and regulation must be reformed to respond to the lessons from the crisis. so i want tonight to comment briefly on three themes : monetary policy ; macro - prudential policy, and the work of the new financial policy committee at the bank ; and the new approach to banking regulation that