. like the us in the late 1990s, we have experienced our own positive “ supply shock ” in the form of a significant wave of inward migration, especially from the accession states, of people looking for work. that has reduced the risk of a rising demand for labour leading to faster wage inflation. but despite greater availability of labour, businesses have not over the past year expanded employment sufficiently to prevent stronger demand from increasing capacity pressures. the bank ’ s agents report that capacity utilisation is now at an unusually high level. these pressures encourage businesses to raise prices. and that is exactly what the business surveys suggest has been happening. a position in which growth is above its long - run average and businesses are already operating with pressures on capacity is unlikely to be one without inflationary risks. that is one reason why the monetary policy committee has raised interest rates over the past year. the second question is about money and credit. the quantities of broad money and bank lending are now around 14 % higher than a year ago – rates of growth last seen in 1990 when inflation was more than 8 %. but again, we should be cautious. if credit becomes cheaper and more widely available, thereby increasing the stock of money ( a “ money supply shock ” ), households and businesses will increase their spending on goods and services and on assets, both financial and real, and this will push up on inflation. but if they wish to hold more money in their portfolios – a “ money demand shock ” – then the extra money will have few, if any, implications for inflation. so why have money and credit been growing so rapidly? given the pace of their expansion, it is likely that there has been both a demand and a supply shock. the supply shock is that banks have become increasingly willing to provide finance. credit has been readily available and the spread between interest rates paid by households and businesses and interest rates available in the money market has fallen. that is one factor behind the rapid growth of business investment spending over the past year. in light of the greater availability of credit, any person or family that borrows at a variable rate should recognise that the interest rate they will pay in the future may vary. obvious though the point may seem, it is unwise to borrow so much that the repayments are affordable only if interest rates remain at their initial levels. indeed, wider and cheaper availability of credit was a “ shock ” that boosted spending, and so was a further reason why the monetary policy committee raised interest rates

. access to central bank money or asset swaps should, as far as possible, encourage banks to manage liquidity risk prudently. without the correct pricing structure, the incentives to encourage future risk taking are obvious and potentially large. valuation margins – or haircuts – are used to protect our balance sheet. by themselves, they aren ’ t sufficient to create a general pricing structure. the cost imposed by a margin depends primarily on the difference between the costs of secured and unsecured funding, and that will vary across banks and over time. so the key is in the interest rates charged by the central bank. the second challenge is to overcome the ‘ stigma ’ problem that has plagued the use of central bank facilities throughout the crisis. commercial banks have feared that, by accessing funding from the central bank, they would acquire a ‘ black spot ’ in the market. they have been reluctant to come to their central bank unless in good and extensive company. these are challenges that all major central banks are grappling with. they will not be easy to overcome. but with our international colleagues we are aiming to devise a framework that does so. the prize will be an integrated framework, covering all our lending to the banking system and one that i hope, by making clear the terms on which liquidity will be provided in times of stress, will focus the minds of banks long before those stresses emerge. during my second term as governor i would like to see us establish a framework for financial stability that is on as sound a footing as the one we have successfully established for monetary stability. the measures i have described would go a considerable way to achieving that. but just as no framework for monetary policy can prevent shocks from hitting the uk economy, we need to think carefully about why financial crises have been both persistent and damaging. that leads me to one final thought on which i want to end. for reasons of historical accident we have created over many decades a financial system in which the incentives to monitor risk - taking have been sharply reduced. it is often said that the role of a central bank is to take the punch bowl away just as the party is getting going. that approach has served us well in monetary policy. but all those efforts will come to naught if the opposite applies to the financial sector. if banks feel they must keep on dancing while the music is playing and that at the end of the party the central bank will make sure everyone gets home safely, then over time the parties will become