were to fail. but you have to remember that i was watching the opera over a month ago. perhaps today she would come up with a somewhat more positive answer. turandot's third riddle was " what is the frost that burns … … and makes a king of the one it accepts as a slave? " well for a time that stumped me completely! not that it mattered much by then - i'd already failed the first two of turandot's tests, so i knew i was for the chop anyway! but then i began to reflect on the implications of it all for our own economy here in the uk. and i even recalled that previous occasion on which i had dined with you here at the act dinner. at that time we'd had just 2½ years of growth with low inflation - after the 1990 / 91 recession. i told you that we were determined to maintain price stability as a necessary condition for sustainable growth of output and employment. you all hooted with laughter! your president said it had been the best joke of the evening - even though you'd heard it many times before! well we've now had 10 years of low inflation - with continuous, quarter - by - quarter, gdp growth, and the number of people in employment is at a near - all - time high. what i confess i did not anticipate at that time was the difficult international environment in which we've had to operate over the past four years - including both the global economic slowdown and the persistent strength of sterling against the surprisingly weak euro. it must be that external environment - which has clearly had a dampening effect on demand and output in this country - that is, for us, the frost that burns. there was nothing that we could do ourselves directly to address the causes of these problems which had their origins abroad. what we could do - and indeed have done - is to offset as best we could the effects of the external frost by turning up the domestic heat in our economy, cutting interest rates to their lowest level for 40 years - which is where they've been for the past 12 months - consciously encouraging consumer spending on the back of rising house prices and a rapid build up of household debt. so although we've been reasonably successful in maintaining stability in the uk economy as a whole, we've had to live with a painful imbalance within the economy - between the internationally exposed sectors, including much of manufacturing, which have been

##s yields over the yields on comparable treasury securities to rise sharply. together with the increased fees imposed by the gses, the rise in this spread resulted in higher interest rates on conforming mortgages. more recently, agency mbs spreads and conforming mortgage rates have retraced part of this increase, and conforming mortgages continue to be readily available to households. however, for the most part, the nonconforming segment of the mortgage market continues to function poorly. in corporate debt markets, yields and spreads on both investment - grade and speculativegrade corporate bonds rose through mid - march before falling more recently. issuance of investment - grade bonds by both financial and nonfinancial corporations has been quite robust so far this year, but issuance of new high - yield debt has stalled. strains continue to be evident in the commercial paper market as well, where risk spreads remain elevated and the quantity of commercial paper outstanding, particularly asset - backed paper, has decreased. commercial and industrial loans at banks grew in january and february, but at a considerably slower pace than in previous months. these developments in financial markets – which themselves reflect, in part, greater concerns about housing and the economic outlook more generally – have weighed on real economic activity. notably, in the housing market, sales of both new and existing homes have generally continued weak, partly as a result of the reduced availability of mortgage credit, and home prices have continued to fall. 1 starts of new single - family homes declined an additional 7 percent in february, bringing the cumulative decline since the early 2006 peak in single - family starts to more than 60 percent. residential construction is likely to contract somewhat further in coming quarters as builders try to reduce their high inventories of unsold new homes. private payroll employment fell 101, 000 in february, after two months of smaller job losses, with job cuts in construction and closely related industries accounting for a significant share of the decline. but the demand for labor has also moderated recently in other industries, such as business services and retail trade, and manufacturing employment has continued on its downward trend. meanwhile, claims for unemployment insurance have risen somewhat on balance, and surveys indicate that employers have scaled back hiring plans and that jobseekers are experiencing greater difficulties finding work. the unemployment rate edged down in february and remains at a relatively low level ; however, in light of the sluggishness of economic activity and other indicators of a softer labor market, i expect it to move somewhat higher in coming