if it were to occur, it would be an example of the type of imbalance that could threaten the end of the expansion, and therefore threaten the downward trend in unemployment. wage surges ended two of the past three expansions - it is important that it does not happen again this time. i think good sense will prevail, and that anyone who is encouraging “ double compensation ” will think again. conclusion i think we have still got a long way to go in this expansion. it is already longer than its predecessors, and if we as a community are sensible and do not allow short - term thinking to overcome our long - term interests, it could rival in length the expansions of the 1950s and 1960s. as for monetary policy, we think it can play a very important part in achieving that end. inevitably, there will be those who agree and those who disagree with what we are doing. we think, however, that monetary policy should be judged, not by any particular movement in interest rates, which will always be surrounded by some element of controversy, but by its performance over the whole of the expansion.

of tightening supply conditions in pockets of the country, but dwelling construction overall is responding to low interest rates much as it always has done. 4. 2 consumption and the behaviour of borrowers and savers what about the effect of low interest rates on household consumption? this can be modelled in a simple way by linking household consumption to disposable income and household wealth. in such a model, lower interest rates affect consumption indirectly by increasing household disposable income and boosting both housing and equity prices. 8 this simple model ( like the dsge model results i discussed ) provides some tentative evidence that consumption growth has been a bit weaker over recent years than suggested by historical experience. much of that history, however, captures the period of adjustment to easier access to credit from the early 1990s to the mid 2000s. at that time, household indebtedness increased substantially and the saving ratio declined to be well below earlier norms ( graph 4 ). 9 so in a way, the more recent experience could be regarded as the more standard response. indeed, the behaviour of late appears more sustainable than that of the previous episode. 10 one aspect of this change in behaviour is evident in households injecting equity into the housing stock over recent years. that is, their net new spending on housing assets has exceeded their borrowing secured over housing. this stands in stark contrast to the period of strong housing market conditions in the first half of the 2000s, which saw households withdrawing housing equity to help finance their consumption ( graph 5 ). 11 as i just mentioned, the experience of recent years is characterised by slightly lower growth of consumption than might have been expected. however, the responsiveness of consumption to disposable incomes and wealth does not appear to have changed, at least in a statistically significant way. there are two possible explanations for this observation. first, the growth of consumption of late could be affected by factors other than the stance of monetary policy. second, it may be that the strength of the various monetary policy transmissions channels affecting consumption has changed, but in ways that are difficult to identify using models of aggregate household behaviour. although it is hard to be definitive, my sense is that both these explanations are likely to be true. estimates of wealth effects tend to differ somewhat based on the exact data and methodology used in their estimation. previous work by bank staff suggests that households consume between 3 and 4 cents out of every extra dollar of housing wealth. for examples, see dvornak n and m