. banks have responded to the loss of confidence in the financial markets, and the deterioration in economic prospects more generally, by tightening the terms and availability of credit so as to bolster their weakened balance sheets. that threatens to generate an adverse feedback loop : the worse the outlook becomes, the lower the chance of a loan being repaid and the more cautious the banks become about extending new loans, making the outlook yet bleaker. we hear many stories of businesses finding credit harder to get, though i understand that a recent nfu survey found that farmers ’ relationships with their bankers remained fairly good. the only bright spot – at least for most of us, if not for you – has been the collapse in commodity prices as the slowdown spread to the emerging market economies. oil is back to $ 45 a barrel ( see chart 2 ), while the economist food index has fallen by over 30 % ( in dollar terms ). last week, we published our latest inflation report, laying out our current assessment of the outlook. it does not make for pleasant reading. global demand fell sharply in the fourth quarter of 2008 and most forecasters expect a contraction in the advanced economies this year and negligible overall growth ( see chart 3 ). here in the united kingdom, gdp is estimated to have fallen by 1. 5 % in 2008 q4. business surveys point to a similar contraction in the first quarter of 2009. household spending is declining. investment intentions have fallen sharply. credit availability has continued to worsen. and the four - quarter rate of growth of overall money spending in the economy has fallen to its lowest since 1959 ( chart 4 ). a sharp contraction in activity, both here and abroad, is already baked into the cake for the first half of this year. but there are grounds for thinking that conditions may start to improve later in the year, as there is a substantial economic stimulus already in the pipeline. first, since october, the mpc has cut bank rate by four percentage points to 1 %, the lowest level in the bank ’ s 315 - year history. the dysfunctional credit markets mean that a given reduction in bank rate has less impact on the economy than in normal times. even so, it still represents a powerful stimulus, which will take much of this year to work through. of course, since interest rates cannot fall below zero, we are running out of room for further cuts. but it must not be forgotten that even if bank rate remains where it is, the recent cuts

the uk has enjoyed since the new monetary framework was put in place. but a fairer measure of the mpc ’ s success is perhaps the fall in inflation expectations since may 1997 ( which can be derived from prices of government bonds ) which has brought the cost of long - term borrowing down to historically low rates. i think that this provides some measure of the growing credibility of the monetary policy framework ; and the expectation that we have moved into an era where we can expect low and stable price conditions. core purpose : financial stability i will say more later about the current position of the uk economy, but first i would like to say something about the other functions of the bank which are perhaps less familiar than the mpc. the bank ’ s second core purpose is maintaining the stability of the financial system. the bank is no longer responsible for the supervision of individual firms but has a clear interest in ensuring the financial system functions smoothly. as the asian crisis in 1998 and the problems in japan show, dislocation of the financial system can impose significant economic costs and it is the bank ’ s role, looking at the system as a whole, to identify potential threats and vulnerabilities. in some respects this interest is integral to the bank as a central bank. for example, secure and efficient payment and settlement systems are an essential condition for economic growth, providing the means for money to flow between individuals, businesses and government. like other essential services - electricity, water - it is easy to take payment systems for granted. but the amounts involved are huge : 30mn transactions are processed every day in the uk clearing system, the value of which totals over £800bn every week. these payments ultimately result in transfers between settlement banks across accounts which they maintain at the bank of england. a failure in the payment system could have an immediate impact on the economy and the bank has worked with clearing banks to reduce the risk to the financial system, first by the introduction of real - time gross settlement and now by moving towards delivery versus payment in securities markets. less esoteric, perhaps, is our interest in the financial stability of individual firms and the structure of the financial system as a whole. while responsibility for individual firms lies with the fsa, the bank takes a close interest in the impact on the wider economy of the regulatory structure and the links between individual institutions and markets. the bank also has a direct role as lender of last resort. in the event that a bank has liquidity difficulties that might