but limited deterioration in growth. the threat of a strengthening feedback loop from a contracting banking sector to a severe downturn in the real economy had not disappeared but did not seem the central case. but the risks and the challenges changed dramatically in the autumn. first, the losses incurred by investors in the rescues of fannie and freddie combined with the decision to allow lehman brothers to go into administration, led to a dramatic loss of confidence in financial markets ( chart 5 ) threatening a savage further twist in the squeeze on credit for households and companies. second, we saw a sharp weakening in oil prices ( chart 6 ), with the odds implied by options of such a fall less than 1 %. other commodity prices also fell. and, even before that was reflected in consumer prices, the public ’ s inflation expectations turned down decisively. in short, the balance of risks between inflation being above or below target in the medium term shifted decisively to the downside. that was the background to the internationally coordinated reductions in interest rates in early october and the aggressive cut of 150 basis points in bank rate in november, the largest reduction in official interest rates since 1992 ( indeed i believe it was only the third time bank rate had been cut by 150bp since the bank was founded over 300 years ago ). even so, our latest medium term projections for inflation show inflation remaining below target in the medium term and suggest further reductions may be necessary ( chart 7 ). of course, there are large uncertainties around that projection ; more so than usual. in particular, they take no account of any fiscal measures that the government may announce next week. just as we had to change gears on monetary policy, so we needed to change our approach to the banking sector. the tripartite authorities – the bank, fsa and treasury – were criticised for the handling of northern rock and for being slow off the mark when the crisis started in 2007. but we learned from that experience. we have established new ways of providing the market with the liquidity that it needs. and, as the crisis has widened, we have dealt with vulnerable and failing banks, such as bradford and bingley, more speedily and cleanly. but as the crisis deepened in late september, it became clear that we needed more than a case by case approach here to tackle the continuing loss of confidence in the banking system in the uk, in euro area and in the us. on 8 october therefore we announced a comprehensive package of measures including support for

john gieve : learning from the financial crisis speech by sir john gieve, deputy governor of the bank of england, 2008 europe in the world lecture panel discussion, at the european business school, london, 19 november 2008. * * * the years after sterling left the erm were the most successful and stable in my lifetime. in early 2007, for example, inflation had not moved by more than a single percentage point away from target in the previous 10 years, the output of the economy had grown in every quarter since 1992 q3 ( chart 1 ), unemployment had fallen by 5 percentage points from its peak in the early 1990s and living standards had steadily increased. interest rates had been low and stable. however as we know now, that was the end of “ the great stability ”. the summer ushered in a period of extraordinary turmoil in western financial markets which we are still trying to calm. and this year has seen the onset of recession not just in europe but throughout the advanced economies. despite the dramatic policy measures of the last months, the outlook for 2009 is bleak and the prospects beyond are uncertain. that move – in the space of only 12 months – from the policy maker ’ s dream of steady noninflationary growth to the biggest banking crisis since the outbreak of world war i and the onset of recession sets the questions for this evening. first, how did we get into this position? second, what are the immediate challenges for policy? and finally, what lessons should we draw for the future? how did we get here? the path that led from losses in the us sub prime housing market to a collapse of confidence in the western banking system and a savage credit squeeze has been described many times, most recently in the bank ’ s financial stability and inflation reports. i don ’ t need to repeat that here but i would highlight two features : first this is a global story ; second, the nature of the crisis has changed over the past 15 months and has called for a changing policy response. a global crisis you cannot explain recent developments on a national basis, even in the us. the roots of the crisis lay in global imbalances in trade and capital flows between advanced and emerging economies. the rapid growth of exports from asia, and latterly the gulf, was reflected in a substantial build up of savings. in china the national saving rate peaked in exceeded 50 % of gdp. those funds flowed back to the developed world and to the us in particular. that kept interest rates low