bank measures announced ( 12th jan source : dealogic. data to end - december 2007 dec 2007 ). chart 5 : mortgage arrears and possessions rates chart 6 : household secured and corporate credit availability net percentage balances ( a ) easier credit corporate percentage greater than 3 months in arrears percent household secured 0. 9 0. 8 0. 7 0. 6 0. 5 0. 4 - 10 - 20 possessions ( lhs ) - 30 0. 3 0. 2 arrears ( rhs ) 0. 1 - 40 - 50 - 60 source : cml back cast data before 1994 tighter credit q2 q3 q4 q1 q2 q3 q4 q1 reported change, past three months expected change, next three months source : bank of england credit conditions survey chart 7 : quoted mortgage spreads chart 8 : mortgage product availability ( a ) thousands basis point spread to funding rate svr credit impaired prime bank rate tracker 5 yr fixed 2 yr fixed - 50 source : bank of england. ( a ) svr mortgages spread over one month lag of bank rate ; tracker mortgages spread over bank rate ; 2 yr, and 5 yr fixed rate mortgages spread over one month lag of 2 and 5 year swap rates. feb mar aprmay jun jul aug sep oct nov dec end dec source : moneyfacts. chart 9 : household saving ratio chart 10 : correlation between growth in house prices and consumption rolling ten - year correlation coefficient between real annual house price inflation and consumption growth 16 % 14 % 1. 0 0. 9 0. 8 12 % 0. 7 10 % 0. 6 8 % 0. 5 0. 4 6 % 0. 3 0. 2 4 % 0. 1 2 % 0. 0 0 % 1970 1975 1966 1971 1976 1981 1986 1991 1996 2001 2006 1980 1985 1990 1995 2000 2005 source : ons source : bank calculations. chart 11 : commodity prices chart 12 : general public inflation expectations us dollars per barrel index, 2000 = 100 economist food index ( rhs ) economist metals index ( rhs ) brent oil spot prices ( lhs ) 3. 2 bank / nop 3. 0 2. 8 2. 6 2. 4 2. 2 2. 0 1. 8 2000 2001 2002 2003 2004 2005 2006 2007 2008 source : datastream and bank calculations 1. 6 feb00 feb01 feb02 feb - feb03 feb05 feb06 feb07 source : bank

looking at the economy today there are as wide a range of uncertainties as ever, for example about the level of slack in the labour market, the pricing pressures in companies, the future path of oil prices and the strength of monetary growth. i want to discuss three which arise from developments in financial markets, and which are relevant to both the bank ’ s core purposes : monetary stability and financial stability. sub prime and the credit markets let ’ s start with the credit markets. the backwash from defaults in the us sub prime market has been seen not just in the recent problems faced by some hedge funds 1 exposed to this sector but in credit markets more widely. credit spreads have widened especially for riskier bonds ( chart 3 ), the covenant lite loans on offer a few weeks ago are off the table, and the leveraged loans in the warehouses are reported to be moving more slowly. and this has happened at a time when long term interest rates have been rising. we have seen shocks to credit markets in the last two summers which were swiftly reversed. could recent events be the beginning of a more lasting change? there are some good reasons for doubting it. first the underlying economic and corporate fundamentals remain encouraging. not only is world growth running at over 5 % but it seems better balanced with the recovery of germany and japan and slightly lower growth in the us ( although one of the explanations for the rise in longer term risk free rates has been a more optimistic view on us growth prospects ). in the corporate sector overall gearing is not unusual, pension deficits have diminished, and profitability is high. defaults in the prime housing market in the us have not shown dramatic increases. losses on mortgage lending in the uk are still very low and there seems no prospect of a significant rise in unemployment that led to sharp rises in repossessions and defaults in the past. equity markets remain strong at multiples of earnings which are little above average. again, within financial markets, liquidity remains high overall ( chart 4 ). against that background, there is a risk of becoming alarmed by good news. in our last financial stability report we identified the low risk premia in credit markets as the principal vulnerability in financial markets because of the risk it carried of a swift and disorderly return to more normal levels. the rise since then has not been large in a longer context ( chart 5 ) but in itself it is a healthy correction. at the same time we have seen a fall