nearly 6 years since the start of the crisis, the level of output in the economy is still 2 % below its peak in 2008. a conservative extrapolation of the pre - crisis trend would suggest that uk output is some 15 – 20 % below where it would have been expected to be by this time in the absence of the crisis. it seems unlikely that we will recover much of that gap and in any case the calculation is getting less precise and less relevant. eventually, economic historians may work out what happened to potential output and we should establish a new reference point. as things stand today, it is difficult to know precisely where the new sustainable growth path of the economy lies ( especially as data for the past few years are still likely to undergo significant revision by the ons ). but with unemployment still elevated, and diminishing signs of inflationary pressure in both goods and labour markets, we can be reasonably confident that the economy needs to grow strongly for some time to come, to regain a stable and sustainable medium - term trajectory. the challenge for the mpc is to assess when inflationary pressures will be building and thus when we need to start withdrawing stimulus, so that once we have eliminated slack in the economy, monetary policy is consistent with stable, sustainable growth and hence stable inflation around the target ( subject of course to the other forces acting on the economy at the time ). that ’ s an extremely optimistic expectation of what policy can achieve, so let me put it slightly differently. the realistic challenge for the mpc is to avoid a big mistake either by choking off the recovery too soon, leaving the economy in a quagmire, or by allowing inflationary pressures to build excessively, requiring a sharp tightening in interest rates ( and the potential for another recession ) to bring inflation back under control. forward guidance is a policy framework designed, amongst other things, to help avoid big mistakes. we can encourage and probe growth in the economy by committing not to tighten policy until the economy has used up more of its spare capacity. on one view the policy is simple – we must give the economy plenty of time to establish the recovery before we start to raise interest rates or unwind asset purchases. at another level, some critical judgements are bis central bankers ’ speeches going to be needed because the timing is inevitably uncertain. given those uncertainties, forward guidance delivers a framework within which the mpc can explore the scope for economic expansion without putting price and financial stability at risk. that guidance

month by month there have been a series of small downside surprises in the inflation rate as oil prices have been relatively stable ; the effects of administered and officially regulated prices now seem to be a bit less than previously expected ; inflation expectations remain well anchored and the exchange rate has been rising which may help keep a lid on imported costs for a while ( but importantly, at the cost of less balanced growth which is a separate problem ). taking the inflationary news together, it would appear that we have a favourable situation in which to explore how much more capacity the economy has, before inflationary pressures begin to build. another positive factor supporting our probing strategy is the emergence of macro - prudential policy. monetary policy has a difficult challenge ahead, as i have outlined. it will help enormously if financial policies can help deal with, or at least mitigate the risks from, some of the imbalances that are arising in the economy while the mpc aims to restore medium - term stability in the economy as a whole. the housing market is an example of where monetary and macro - prudential policies can helpfully interact and the november 2013 financial stability report sets out some of the policy measures that are underway or could be called on if necessary. bis central bankers ’ speeches funding for lending scheme one decision that has been implemented is in relation to the funding for lending scheme ( the fls ). the fls contributed to a substantial fall in bank funding costs after it was launched in july 2012. this fed through to a significant improvement in household credit conditions. rates on new household lending have fallen markedly since mid - 2012, with falls of more than 100 basis points in some representative mortgage rates. both gross secured lending and repayments have picked up strongly. and the number of approvals for house purchase has risen significantly, indicating higher mortgage lending in future. the scheme has probably been one of the driving influences behind the resurgence of business and consumer confidence – although there are many other factors behind the sort of swing we have seen. partly because of its own success, there is no longer a need for the fls to provide broad support to household lending. it is not the case that net lending for mortgages by uk banks is, as yet, excessive. indeed, the annual rate of growth in the stock of secured lending to individuals was under 1 % in november 2013. but sharply rising house prices are a potential source of instability and we should not risk adding policy oil to that particular fire. credit conditions