affected by the rise in libor relative to risk - free rates. and retail rates – for both loans, and some deposits – have risen relative to the relevant risk - free rate. effective rates on some types of lending are not much changed since last summer, but we have cut bank rate by 75bp and the risk - free curve has shifted down ( chart 2 ). all this is true in the us too, probably more so. that has led john taylor himself to suggest 8 that, to maintain an unchanged policy stance, the policy rate should be reduced by the extent of the widening in spreads. in fact, as i am sure taylor recognises, it is nowhere near so straightforward – if for no other reason than that, for the real economy, the most severe feature of the credit shock is the rising incidence of quantity rationing. 9 there appears to be some discrimination between lower - risk and higher - risk borrowers in the household sector. rates on fixed - rate mortgages have recently been cut for lower loan - tovalue borrowers. we have added a question to our current credit condition survey, due out later this month, to gauge conditions in that part of the market. plainly, conditions have tightened a lot for riskier borrowers – households and firms. that means we need to look at quantity data as well as at the price of credit. for companies, money growth has fallen very sharply. lending held up for a while, but possibly in part because firms were drawing on committed lines of credit while they were still available on pre - turmoil terms. the credit conditions survey has signalled a clear tightening ( chart 3 ). to translate this back into a taylor - rule world, we would need to know the so - called “ shadow prices ”. of course we don ’ t know those unobservable prices. but we can, perhaps, get a broadbrush handle on the materiality of the tightening by using estimated equations for credit ( and money ) demand, holding all other influences constant. 10 there is just huge uncertainty see tucker, pmwt ( 2008 ), “ the credit crisis : lessons from a protracted peacetime ”, remarks given at the chatham house conference on “ the new financial frontiers ”. these remarks are also forthcoming in the 2008 q3 edition of the bank of england quarterly bulletin. see taylor, jb., ( 2008 ) “ monetary policy and the state of the economy ”, testimony before the committee on financial services, us

of commerce. as many of these have been going for quite a while, we have in many cases been able to establish their usefulness as predictors of the not - yet - available official data. second, we also rely on the information provided by our network of regional agents who have about 8000 business contacts across the country. they can often help the mpc understand what lies behind puzzling movements in the official data or in the business surveys. and, though the evidence they provide is more qualitative rather than quantitative, they can give us early warning of major cyclical developments. the outstanding example here is in the aftermath of the collapse of lehman brothers and the subsequent near - seizure of the global financial system in early october 2008, when our agents reported many of their contacts saying that “ orders had fallen off a cliff ” – the first real indication of the severity of the contraction that was to follow over the next nine months. the sharpness of that contraction, as well as its unexpected nature, can be seen in chart 1, which plots the path of four - quarter real gdp growth on top of the fan chart associated with the mpc ’ s projection for growth, conditioned on prevailing market interest rates, made in august 2008. given that each shade of green corresponds to 10 % of the possible outcomes and the whole fan covers 90 % of the possible outcomes, it can be seen that the mpc had collectively assessed the probability of contraction over the four quarters to 2009 q2 as about a half, but the probability of growth being less than – 1½ % as just 1 in 20. now the mpc does not attempt to calibrate the probabilities associated with tail events precisely. but it is a fair bet that, if we had, then we would have put the chances of a contraction as large as the ons ’ s current estimate of 6 % as being virtually negligible. it is worth stressing that we were not alone in thinking a very severe contraction in activity was unlikely. almost all forecasters were in the same boat. for instance, when we prepare our projections each quarter, we also canvass the views of outside forecasting bodies. their assessment of the probabilities of various ranges of possible outcomes was very similar to ours. chart 2 illustrates the same point, but puts it into a broader context. the blue line shows the actual path of four - quarter gdp growth over the period since the creation of the mpc, while the pink line shows