s going to happen to interest rates? ” is asked of us routinely. ( sometimes it ’ s phrased directly, sometimes more circuitously, but it always seems to come in one form or another. ) and perhaps it ’ s understandable that people should want to know, particularly in an environment as uncertain as this. if it were possible to eliminate or reduce at least one source of unpredictability, wouldn ’ t that be a good thing? and since the mpc is in control of interest rates why can ’ t it just tell us what it ’ s going to do? the problem is that we can ’ t be sure. interest rates are not an end in themselves. they ’ re a means of meeting our objectives : the stabilisation of inflation over the medium term and, subject to that, the stabilisation of economic activity. and because there are lots of unpredictable shocks hitting the economy, things that would otherwise ( and often do ) move output and inflation around, the appropriate path of interest rates is necessarily unpredictable as well. the skipper of a boat, adapting to a skittish wind, and interested in making the journey as smooth as possible, may have perfect control of the tiller. but that doesn ’ t mean she can tell you exactly which position it will be in at every point in the future. that will depend on the direction of the wind at the time. it ’ s not that monetary authorities are unconcerned about expectations of future interest rates. quite the opposite : these expectations are central to the transmission of policy. we directly determine only one particular – and very short - term – interest rate ( what commercial banks get paid on their overnight deposits, or “ reserves ”, at the central bank ). but demand and spending depend more on longer - term interest rates. in the uk, around half of corporate borrowing has a maturity of three years or more. some mortgages have interest costs tied directly to bank rate but most are now fixed for at least two years. and these longer - term rates depend in their turn on expectations of how the short - term interest rate evolves over the future. so they matter. equally, however, these expectations should – and generally do – respond to the news about the economy of their own accord, without the need for any explicit prompting by the central bank. the private sector forms its own views about how the economy might evolve over the future, views that are continually adjusted as new information comes in.

of banks issuing bonds even without the use of the guarantee. libor spreads have also edged down and are now expected to fall a bit further and faster than before the package ( chart 8 ). many banks continue to face a period of deleveraging and rebalancing to reduce their dependence on central bank finance and on short term wholesale funding. however a stronger capital and financing position will make it possible for them to do that over a period of some years, which will diminish the squeeze on lending in the short run. more widely, of course, the financial system remains under acute strain. the falls in equity markets, corporate bond prices and the prices for leveraged loans is hitting both long term institutional investors and leveraged investors, including hedge funds. some are being forced to sell into a falling market in response to margin calls and redemptions. and there are growing signs of stress in many emerging market economies. we have already seen a banking sector and currency crisis in iceland and in the past few days the imf has also announced loan packages for the ukraine and hungary. in short, the package of measures introduced in the uk and elsewhere has improved the prospects significantly, especially for banks but it is too soon to declare the crisis over. authorities worldwide need to remain vigilant and to be ready to step in again if necessary. the medium term agenda we all have lessons to learn from the turmoil of the last fifteen months. i would like to pick out three in particular, two of which are international and one uk specific : • the need to develop new “ macro prudential ” policies to bridge the gap between monetary policy and the regulation of particular institutions and markets ; • the need to establish a more effective regime in the uk for handling failing banks ; and • the need to improve the handling of cross border crises and bank failures. central banks have always paid close attention to asset prices and credit growth in deciding monetary policy but they are setting interest rates for the whole economy and there is no guarantee that the rate or the rapid changes in rates that could be needed to dampen asset price growth will be appropriate more widely. on the other side, regulation and supervision are focused on the resilience and conduct of individual institutions : their management, risks controls, capital and liquidity and so on. what we have found in the last few years is that the sum of what makes sense at the level of individual institutions does not necessarily add up to what is needed for the system as a whole