the importance of movements in credit supply in driving the economy, first up and then down, the two instruments would ’ ve moved in the same direction. chart 2 : period of low interest rates has chart 3 : uk inflation was relatively low in the coincided with weak growth in lending, asset pre - crisis period prices sources : bank of england, nationwide, halifax / ihs markit, thomson reuters datastream, office for national statistics, and bank calculations. equity prices are for an index of uk - focused equities. nominal variables are transformed to real using the consumption deflator. data are for the decade to / from 2007 q3. source : office for national statistics. that ’ s not to say there was no tension at all between the two objectives prior to the crisis. several commentators have claimed that the financial excesses of the time could have been curbed had domestic interest rates been that much higher. indeed the case is still being made, even now that macro - prudential tools are available, that interest rates should respond to changes in financial conditions more aggressively than their implications for inflation would warrant. but going back to the pre - 2008 period, how effective would that have been, and at what price in terms of the stability of growth and inflation? i ’ m not convinced, in an open economy like the uk, where the financial climate is determined more abroad than at home, that higher interest rates would have helped that much – not, at least, without a materially negative impact on growth and a rate of inflation even further below the mpc ’ s target. the tendency for financial cycles to move in common across countries is apparent in data well before 20089. the financial crisis itself was certainly global in nature, and what happened to british banks certainly bears this out. the significant majority of the expansion in the balance sheets of british banks ahead of the crisis, see meeks ( 2017 ). rey ( 2013 ), baskaya et al. ( 2017 ). all speeches are available online at www. bankofengland. co. uk / speeches and of their losses thereafter, involved overseas assets ( charts 4 and 5 ). domestic lending, the most sensitive to domestic interest rates, was not the main source of the problem. chart 4 : pre - crisis growth in uk banks driven by chart 5 : losses predominantly global overseas assets sources : office for national statistics and bank of england. sources : fsa regulatory returns, published accounts and bank of england calculations. data

not only that they occur largely unexpectedly or that they make inference based on past observations inadequate, but also that the complex intertwining of economic relationships characterising this turbulent period can hardly be captured by our mostly linear models. these are times in which the “ flap of a butterfly ’ s wings ” causes tornadoes ( chaos theory ). 26 quickly recognizing the limitations of our analytical tools during these episodes is essential in order to avoid making inappropriate decisions. one can identify three important reasons for “ heightened alertness ” in periods of turbulence of the “ lorenzian ” type. firstly, to the extent that very small initial changes are capable of triggering extremely large changes after a sufficient period of time, it is essential to quickly establish a lucid diagnosis and swiftly take the decisions necessary to avoid as much as possible adverse future developments. secondly, a common feature in the development of highly turbulent episodes is that central banks have to cope with abnormally rapid modifications in the economic and financial environment. these changes might be highly unexpected, erratic and trigger abrupt changes in the risks to price stability. in such exceptional circumstances, credible alertness is vital, and swift decision - making should not be hampered by ex ante considerations other than the delivery of price stability, and, by way of consequence, the anchoring of inflation expectations is of the essence. indeed – and this is the third reason – the risk of unanchoring inflation expectations, whether upward or downward, is particularly acute in such circumstances. thus, it is all the more important to make very clear to markets that, ex ante, they can always map the expected path of the policy rates relative to the evolution of macroeconomic conditions on the basis of the unambiguous goal of very solidly anchoring inflation expectations. lorenz ( 1972 ). some of these points can be illustrated in the context of the recent financial turmoil. let us take the decision to increase rates in july 2008, 11 months after the turbulence began in august 2007. this decision was criticised ex post by some people, particluarly following the intensification of the crisis in mid - september 2008, two and a half months after our decision. i take it that in the perspective of credible alertness, it has been an important and opportune decision. the risks to price stability had increased significantly by the end of the first half of 2008. perhaps paradoxically in a period of financial turbulence, we also saw medium - term inflation expectations beginning to rise, signalling