this is a fairly mild decline, given the size of the external shock to which we have been subject. more importantly, the risks of a sharp slump have lessened considerably since we last met. last december, we had just been through a period in which confidence in the prospects for the global economy, including, of course, the us economy, had reached its lowest point. behind this were concerns about extreme instability in global financial markets and the possibility of a “ credit crunch ”. since then, the us economy has continued its strong performance and concerns about credit crunches have disappeared. indeed, there is now a widespread expectation that the strength of the us economy means that a tightening of us monetary policy is on the cards. evidence has also continued to accumulate of a turn for the better in the countries in east asia which slumped so sharply during 1997 and 1998. inflation in australia, meanwhile, has risen, but very slightly and considerably more slowly than our central forecast of six months ago had suggested. a possibility which we flagged in our november 1998 statement – that competitive pressures in international markets would have a dampening impact on the rises in prices for imported goods – has in fact turned out to be the case. in our latest statement, we have forecast inflation to be about 2 per cent in underlying terms by the end of 1999. in headline terms, the cpi also is likely to be about 2 per cent. this is a little higher than we suggested in the statement, as we have now taken full account of higher international oil prices, which roughly offset the effect of the health care changes. the current account deficit has turned out to be something like 5½ per cent of gdp for 1998 / 99, and was almost 6 per cent in the march quarter. it is highly likely that a quarterly figure over 6 per cent will be recorded in the june quarter. it seems to us that numbers something like that might well be seen over the next few quarters, with the result that the outcome for 1999 as a whole will be about 6 per cent of gdp. the unemployment rate has fallen further, in line with the stronger than expected growth in the economy, and over the past three months has averaged 7. 5 per cent, its lowest for about a decade. given the amount of growth we have had over the past year, some further moderate decline in unemployment will probably be recorded, in net terms, over the remainder of this calendar year. even though the outcome has turned out better than expected, if someone wanted to

interest rates to an historic low of 1. 5 %. similar measures have been taken overseas. my purpose today is to explain how this recession differs from the others i have lived through, why that calls for a wider range of responses than normal, and the difference between the policy objectives in the medium term and the short term. the boom before the bust? what is striking about the run - up to this recession is that we did not see the booms in output, employment and wages that led to past recessions. past recessions, in good measure, reflected deliberate decisions by policymakers to rein in spending and damp the inflationary pressures that had been building up. the rise in interest rates then led to a correction in the spending behaviour of households and companies as optimism about future income growth in the boom turned to uncertainty and gloom in the bust. chart 1 highlights what was happening to domestic output in the two years before the last three recessions. the barber boom was a case in point, when output rose by 10 % over the year to 1973 q1, and then fell by 3 % over the following year. you can see a similar pattern before the recessions of the early 80s and early 90s. but in 2006 and early 2007 growth was close to its average over the past 30 years. that is not the whole story of course. when we look at asset markets, a different story emerges. the credit boom may not have led to a rapid inflation in the price of goods and services, but it did support a surge in the price of a broad range of assets. property prices soared ( chart 2 ). the price of stocks and bonds also rebounded strongly from their early decade lows. that rise in prices was driven by and reflected in a sustained rise in borrowing. a combination of factors – including a large flow of savings out of the emerging economies, and a reduction in the return that investors required to bear risk – had allowed the banks to raise large sums of money at a very low price. and, as memories of earlier busts faded, the margin that banks charged their customers over those lower funding costs was also compressed by increased competition. households and companies were therefore able to borrow more money at ever more attractive terms. loan to income ratios crept up. and uk banks became increasingly dependent on borrowing from wholesale investors overseas ( chart 3 ). by the eve of the credit crunch in 2007, the balance sheets of the banks and households and some companies to whom they had lent large sums