slow sharply. that ’ s why our interest rate decisions need to reflect a view of likely inflationary pressures that looks a couple of years ahead. our central forecast is that the economy will continue to grow strongly over the next year before easing back towards its longer term average, as both household and public spending slow down a bit. but any central forecast is subject to a wide margin of uncertainty, and there are a number of key risks. the housing market is one. obviously, there are many aspects of housing which have nothing to do with monetary policy. it is striking that fewer houses were built in 2001 than in any year since the second world war ; and over 12 % fewer houses were built in the ten years to 2002 than in the previous decade. it is not the mpc ’ s job to control house prices, any more than it is our job to control share prices or the exchange rate ; but just as we would not ignore the wider economic effects of a high exchange rate or a boom in the stock market, so we cannot, and do not, ignore the influence of soaring house prices on consumer spending and hence on the overall pressure of demand. much attention has been paid to the historically high level of house prices relative to earnings, and what this might mean for the future path of house prices. a less discussed question - of more interest to you - is how much influence the current strength of the housing market is having on household spending ; and what impact a weakening in the housing market might have on consumers. healthy as household spending has been in the last few years, there has not a consumer boom on anything like the scale of the late 80s, when house prices last took off. since early 1998, house prices have risen sharply relative to incomes ; but household spending has only grown broadly in line with incomes. a buoyant housing market may still have had some influence on spending ; and spending and house prices may have been influenced by some of the same factors. but spending and house prices do not seem to have moved together as closely as they have done in the past. does that imply that consumers would shrug off a downturn in the housing market? not necessarily. the rise in house prices has meant that households have taken on a lot of debt, and higher interest rates will mean they have less money to spend on other things. while there are few signs of obvious financial stress at current interest rates, given the strength of the current jobs market and the current housing market, this could change,

including the us, have begun to raise their rates to more normal levels. when i joined the monetary policy committee a year ago, both the fed and the ecb had just cut their interest rates to exceptionally low levels, reflecting real concerns about the strength of the world recovery. activity picked up sharply in the us last autumn, but the mood only changed decisively early this year, when a million new jobs were created in just three months. it is now clear that a broad based world recovery is well under way, led by the us and asia, especially china, but spreading to other regions. the news from japan is more encouraging than it has been for over a decade. the uk ’ s major markets in europe are benefiting from strong demand for their exports ; and the latest news suggests that domestic demand in most of these countries is finally picking up, though consumers probably still remain a little wary. as the news from abroad has steadily improved, we have also seen a marked strengthening in demand at home. after a fairly weak first half, retail sales bounced back, the housing market took on a new lease of life and investment began to recover. it now looks as if the uk economy has been growing around or above trend since the middle of last year. it was against that background that the monetary policy committee raised interest rates in three further stages to 4. 5 %. meanwhile inflation remains low, well below the chancellor ’ s target of 2 %. this might seem to bear out the old taunt, that central bankers are the sort of people who want to close the bar as soon as the party starts to go with a swing. it would be fairer to say that we want to be sure that the party remains under control. we don ’ t want to encourage binge behaviour any more than you do, and for much the same reason ; it makes life unpleasant for other people, and it leaves a nasty mess behind. that points to taking action at the first sign of trouble, and preferably before. in current circumstances, strengthening demand is beginning to put upward pressure on costs. evidence from our agents round the country, as well as official statistics, suggests that the labour market is tightening, and firms are having difficulty in filling some vacancies, despite the inflow of workers from the rest of the eu. these are straws in the wind, but if we delay taking action until inflation has taken off, it will be more difficult to bring it down again without causing the economy to