what matters most to you is what actually happens to bank rate, now and in the future. that is because the interest rates on 70 % of loans to households and more than 50 % of loans to businesses are linked to bank rate. 5 and it is the bank of england that controls that rate. we do not intend even to consider raising it before unemployment falls to 7 %. when it does reach that point, we will control whether a rise is warranted, taking into account the strength of the recovery and the outlook for inflation. the upward move in market expectations of where bank rate will head in future could, at the margin, feed into the effective financial conditions facing the real economy. the mpc will be watching those conditions closely. if they tighten, and the recovery seems to be falling short of the strong growth we need, we will consider carefully whether, and how best, to stimulate the recovery further. our forward guidance was clear that, although we would not reduce the stimulus until the recovery is secure, we would if necessary provide more. crossing the threshold to a healthy banking system confidence that interest rates will stay low is a necessary step to securing the recovery, but it is not sufficient. the uk also needs a fit and healthy financial sector. it plays a vital role in generating services output in the uk, creating jobs and in exporting to the rest of the world. to serve the needs of the wider economy by extending credit to where it is needed, banks must command the confidence of their customers and investors. that is why a second element of the bank of england ’ s strategy is to ensure that banks reach a clear threshold of good health. some argue that the repair of banks ’ balance sheets holds back economic recovery because it causes banks to cut back their lending. the reality is the opposite : where capital has been rebuilt and balance sheets repaired, banking systems and economies have prospered. us banks have added more to their capital base since the crisis and, as a result, have been able to provide more credit to their economy than uk banks have to ours. in the past two years, uk banks have reduced their lending to the real economy by 1 %. in those same two years, us banks have increased their lending by more than 8 % ( chart 2 ). within europe, the correlation between the market ’ s assessment of a bank ’ s capital base at the end of 2011 and that bank ’ s lending over the subsequent year is striking ( chart 3 ). without an

the latest data, manufacturing production is 5 % up on a year ago compared with growth of just 1. 5 % in the services sector over the same period. 3 while some of this rebound in the manufacturing sector may reflect temporary factors – such as the turnaround in the global stock cycle – it also shows that british industry is able to take advantage of the recovery in the global economy with the additional support of a competitive exchange rate. the ability of british manufacturing industry to provide strong impetus to private sector growth will be an important offset to the drag to domestic demand from the rebalancing of public finances over the next few years. there is also evidence that strong growth in the global economy is benefiting parts of the services sector. earlier this week, the airport operator baa reported a 7. 6 % annual rise in traffic volumes at heathrow airport in september – driven by strong business travel growth to asia and other emerging markets. from the position a year ago – when demand had fallen sharply at home and abroad in the wake of the financial crisis – this turnaround is impressive. so my verdict on the recovery would be “ so far, so good ”. but we have to recognise that we are still at an early phase of the upswing. it is not surprising, therefore, that growth is uneven across sectors and from quarter to quarter, and that confidence is still somewhat fragile. the state of confidence is not helped by the negative tone of much of the economic commentary at present – which seems to reflect a high degree of nervousness about the data is latest available : for manufacturing it relates to the three months to august and for services to the three months to july. progress of the recovery. but this raises the obvious question : if things are so good, why do they feel so bad – to some people at least? there are three elements which appear to be underpinning these concerns about the sustainability of growth in the current economic climate : the prospects for the global economy ; the prospective impact of the government ’ s fiscal tightening ; and the legacy of the financial crisis. i will discuss these three issues in turn before coming back to the crucial issue of how the bank of england ’ s monetary policy can best support the recovery. the global economic outlook a serious setback for the global economy would have major repercussions for the growth of the uk economy. our economy has a very international focus, and exports, international business activity and the financial sector all play a part in creating strong linkages