. and we, on the mpc, agree that the current rate of house price increases is unsustainable, although it is less obvious that that necessarily applies also to the present level of house prices, though of course it may. in any event, while, of course, we pay close attention to what is happening to house prices, as we do to other asset prices, our principal concern, in this part of the equation, is with consumer demand as a whole - and that depends on a range of other factors, not just on house prices. what is clear is that if external demand does improve as we expect, and if consumer demand growth does not moderate to accommodate it, then we will need at some point to raise interest rates to bring that moderation about. it is important that both borrowers and lenders should understand and take account of that possibility in their decision - making. but you will note the qualifications. it is not a threat - if anything it is a promise. it ’ s what our mandate from the chancellor requires us to do for the very good reason that low, stable, inflation is both a necessary condition for and a reflection of overall macro - economic stability over the medium and longer term, which is clearly what we all want to see. given the qualifications, it is not a promise on which we will necessarily deliver immediately. we start from a position in which inflation is somewhat below our symmetrical target, and there is little evidence at this point of significant inflationary pressure ; wage pressures, in particular, remain relatively benign despite the robust labour market - and it is crucial that that should continue. that gives us a certain amount of time to assess the unfolding evidence on the evolution of both the external situation and the strength of overall domestic demand, though one can legitimately debate just how much risk we can afford to take by waiting. but if and when we do decide to act, you should see that as a sign of the strength of the economy rather than as evidence of weakness. indeed my message to you this evening is that, after a difficult passage over the past twelve months, we can reasonably now look forward to more favourable offshore winds in the period ahead, opening the way to somewhat stronger and better balanced overall output growth, but with inflation remaining close to target. few things are certain in life - the distance between scylla and charybdis has not widened, but it is a more comforting prospect than i was able to offer you last year.

by credible domestic monetary policies. that is a sensible use of the price mechanism to respond to complex and unpredictable shocks. two particularly important exceptions have been the gradual fixing of the exchange rates between members of the european union, culminating in monetary union, and the more or less formal policies of the newly industrialised asian countries and japan to keep the value of their currencies stable against the dollar. moreover, the asian central banks have been accumulating large dollar reserves. for most of the post - war period, the quantity of central bank reserves held by asian central banks was of the same order of magnitude as the reserves held by the g - 7. over the past 15 years, both japan and non - japan asia have rapidly increased their reserves, which are now nearly ten times as large as the combined reserves of the rest of the g - 7. two thirds of these reserves are in dollars, a much larger proportion than the us share of world output. the counterpart to the asian bloc ’ s current account surpluses and acquisition of dollar reserves has been large current account deficits in the us. there is nothing inherently wrong with such ‘ imbalances ’. in principle, they reflect the use of financial markets to allocate savings from around the world to the most profitable investment opportunities. but there is likely to be a limit to the amount of debt that one country can issue as a result of persistent deficits before investors start to worry about its ability or willingness to repay. when the country in question is also the issuer of the reserve currency, the rapid build - up in the assets denominated in the reserve currency contributes to the potential instability of the international monetary system. that might result in nominal exchange rate movements that are far larger than those needed for an orderly rebalancing of asset positions. it is easy to see how each bloc can view this possibility as the responsibility of the others. 1 but that misses the point : the current global imbalances are the natural result of policy decisions by all three blocs. they are, in the language of economists, a general equilibrium outcome. it is therefore meaningless to try to identify the culprit, and blame any one bloc ’ s woes on another. so where does this analysis leave us? let me identify three challenges for the future. first, do we still need a reserve currency as a source of global liquidity? in a world of free capital movements, and developed financial markets, there is no obvious need for