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

more or less stable, and currently remain within the range prevailing over the past decade or so. surveys of household inflation expectations tell a broadly consistent story. for near - term horizons, they have picked up sharply. what limited information we have on the public ’ s broad money ( m4 ) can be adjusted using bank estimates of banks'intragroup business with other financial corporations, as well as banks'repo activity with lch. clearnet's repoclear service. such estimates are based on anecdotal information provided by a small sample of banks. work is under way within the bank to improve the basis of these estimates, see burgess, s and janssen, n ( 2007 ), “ proposals to modify the measurement of broad money in the united kingdom : a user consultation ”, bank of england quarterly bulletin, vol. 47, no. 3, pages 402 - 14. of course, if true risk - free rates fall then, other things being equal, nominal forward rates would fall too, and so would not, on their own, be a good indicator of inflation expectations. given the bulge in asian savings, there are reasons to think that long real rates might have fallen. but this is much less pronounced in us $ tip yields than in uk indexed - gilt yields, and so i incline to the view that the gilt - market “ breakeven ” rates are somewhat distorted. medium - term expectations suggests that the expectations might have been more contained, and might more recently have started to edge down a bit. but it is hard to know how much weight to place on that. but if the upside risks to medium - term inflation are not yet firmly embedded in expectations and so are not evident across the nominal indicators, we certainly cannot conclude that the risk has passed. headline inflation outturns remain elevated, and could top 5 % – well above the 2 % target – for a number of months. not only have goods prices accelerated, reflecting the direct impact of food and energy prices, but services inflation has risen too ( chart 7 ). as a diagnostic of the underlying upside risks, ignoring the direct effect of past increases in food and energy prices, inflation has reached around 2 %. sterling ’ s recent depreciation will give a further impulse to import prices ; and so, other things being equal, may stretch out the period of uncomfortably high inflation, endangering inflation expectations. moreover, there remains a risk of continuing inflation impulses from the persistence