position. but increasingly, attention has turned to a second, more fundamental concern. as a range of asset prices fell, banks began to report large losses. uncertainty about the scale and location of losses led to concerns about the adequacy of bank capital and hence the ability of the banking system to finance continued economic expansion. at the end of last year, sentiment in financial markets worsened markedly. so in mid - december, central banks around the world announced a co - ordinated set of actions in money markets. these were designed to boost confidence by demonstrating that we were conscious of the risks of a credit crunch. since those actions, conditions in money markets have eased considerably. the benchmark 3 - month interbank lending rate has fallen by around 75 basis points relative to expected policy rates. but conditions are not yet back to normal and remain fragile. although central banks can and will respond to the consequences of strains in the banking system for their economies, the solution to the underlying problem does not rest with them but with the banks and financial markets themselves. banks must reveal losses promptly, and, most importantly, raise new capital where necessary. but these developments in financial markets and the banking system have started to affect activity in the economy more widely. interest rates charged to both households and companies have risen relative to bank rate, reversing the relative fall in the year or so before last august. and our own survey of credit conditions last month revealed that lenders intend to tighten conditions further this year. this tightening is unlikely to be short - lived. tighter conditions will discourage borrowing to finance spending on residential and commercial property, on business investment and on consumption. the impact on property prices is already clearly visible. commercial property prices have fallen by 12 % since the middle of last year. and, after rising sharply earlier in 2007, house prices stagnated in the final quarter. although there is a considerable stock of equity in owner - occupied housing, with banks tightening the supply of both secured and unsecured credit, consumers will find it more difficult to borrow to finance spending. so in 2008 it is likely that a less buoyant housing market will go hand in hand with slower growth of consumer spending. tighter credit conditions mean that, as a nation, we are likely to save more of our income this year than in the recent past. in the short run, that will slow economic activity, possibly quite sharply. and there is a risk that weaker activity and lower asset prices could result in another round

has blown across the atlantic, and threatens a sharp slowing in output growth. the latter is the rise in energy and food prices, reflecting continued strong growth in asia, that, together with rising import prices, threaten to lift inflation noticeably above target in the coming months. these two winds have stirred up the water through which the uk economy must pass. the westerly gale first hit us in august as developments in the us mortgage market led to turmoil in global financial markets. for some years, banks were able to borrow cheaply in world capital markets to expand their lending. they packaged the resulting loans and sold assets backed by those loans to capital market investors. they were able to do that because some investors had failed to adjust to lower rates of return caused by high savings in emerging economies and low inflation at home. those investors engaged in a “ search for yield ” by buying risky assets without always understanding fully the risks attached to them. families and businesses had access to more finance at lower cost. that was most obvious in the growth of the us sub - prime mortgage market, where the potential problem of lending to people who could not repay when the interest rate was reset on their floating rate mortgages was becoming only too clear. in the united kingdom too, borrowing and spending growth were strong and inflationary pressures built up. but in august all that changed dramatically. rising default rates in the us mortgage market led investors around the world to question whether they were being adequately compensated for the risks they were bearing on a wide range of assets – not just those associated with sub - prime mortgages. the prices of those assets fell, and markets closed for a range of complex credit instruments. as i said two years ago, “ risk premia have become unusually compressed and the expansion of money and credit may have encouraged investors to take on more risk than hitherto without demanding a higher return. it is questionable whether such behaviour can persist ”. and, as we have seen, it hasn ’ t. the re - pricing of risk that is still continuing is not a process that we should try to reverse. adjustment to this has been painful for banks in the major financial centres in two ways. first, with some asset markets closed, banks found funding more difficult. some needed to finance loans they had made but had then expected to package up and sell. others needed to finance off - balance sheet investment vehicles that were no longer able to fund themselves. at the outset of the crisis, banks were concerned to protect their liquidity