of interest rates we need not just to focus on the level of bank rate. we need also to take account of the impact of the turmoil in the banking sector which is now leading to a fierce squeeze on credit especially in the housing market but not just there. the increase in bank margins over safe rates have offset the cuts we have made to bank rate since last summer and the tightening of other conditions have introduced some quantity restrictions which are not fully captured in price. our credit conditions survey suggests that this squeeze may intensify in the coming months. timely sources of data suggest that the economy is already slowing fast. the cips survey balances are now pointing to a contraction in activity in manufacturing, construction and services ( chart 4 ). house prices and transaction numbers are falling rapidly with direct effects on house builders and related services. and while there are winners as well as losers from lower house prices, there are signs that the housing market is affecting consumer confidence. more broadly, there are signs that the tightening of credit conditions is beginning to affect both consumption and investment. most importantly, the sharp increases in commodity prices are squeezing real take - home pay which is bound to impact on consumption at some point. conclusion i began this speech by highlighting how the recent events in financial markets have been facilitated by the integration of emerging economies into the global economy. of course, i could make an even closer link with rising commodity prices. the rapid expansion in activity in these economies has inevitably put pressure on the global price of energy and other raw materials, whose supply is relatively fixed at least in the short run. that is showing up in rising inflation world wide ( chart 5 ). so is it right to conclude, as some have, that the path of inflation is determined abroad? certainly commodity prices have an effect in the short run. but it is domestic monetary policy – the decisions that the monetary policy committee take each month, together with the overarching framework that defines our target – that determines the path uk inflation in the medium - run. the mpc will continue to assess the balance between the risks of higher inflation from the commodity cost shock and the downside risks to output ( and to inflation in the medium term ) from the credit crunch. but i can assure you that we will do whatever it takes to bring inflation back to target in the medium term. chart 1 : financial market liquidity chart 2 : eme holdings of fx reserves liquidity index 1. 0 per cent 0. 8 0. 6 0.

john gieve : the financial cycle and the uk economy speech by sir john gieve, deputy governor of the bank of england, at the london stock exchange, london, 18 july 2008. * * * introduction these are troubled times for both the city and the economy more widely. after 15 years of unbroken growth and low inflation, the prospect for the rest of this year is uncomfortable : inflation will continue to rise sharply while growth tails off and unemployment picks up. and the downturn is particularly pronounced in the banking sector. while the acute concerns about funding that emerged last summer have ebbed a little since march, worries about future losses, profitability, and even the viability of some business models, have been growing on both sides of the atlantic, leading to sharp falls in most equity prices and, in the uk, to difficulties in bank rights issues. this morning i want to say a little about the challenges this sets the mpc in the short term but also to address some of the longer term lessons of the credit crunch. global imbalances and the credit crunch one of the striking aspects of this downturn is that it started – at least in europe – in the financial sector. the level of defaults on lending to households and companies is still very low. the credit squeeze here has not been, initially at least, a response to losses at home but driven by the dramatic loss of liquidity in financial markets ( chart 1 ) which was set off by the us sub - prime downturn. one puzzle has been why that problem in one part of one country ’ s housing market has triggered such global turmoil. of course the us is not just any country. but while the numbers may look large in absolute terms, even if sub - prime losses reach $ 500 billion as the imf have suggested 1, they will be quite modest relative to the size of the whole banking system. the answer is that sub - prime provided only the initial spark and the fire fed on much broader weaknesses in the financial sector, which in turn had been allowed to develop by imbalances in the global economy. the most striking feature of the world economy in the last decade has been the explosive growth of china and other emerging economies. for example, since china joined the wto in 2001, its imports and exports have expanded on average by 25 % each year, more than twice the growth in world trade over that period. but these countries have been reluctant to rely, in net terms at least, on foreign capital