when inflationary pressures fall away, perhaps because of a sharp deterioration in the international environment, we can be relied upon to ease. it certainly does not mean, as some commentators have asserted, that we operate in some kind of strait - jacket which requires us to suppress economic activity at every opportunity. monetary policy aimed at delivering predictably low inflation enables the economy to maximise sustainable growth and employment opportunities. conclusion the sharp downturn in many of our major export markets may well turn out to be the most serious shock to hit the new zealand economy since the oil shocks of the ‘ seventies. if so, the benefits of recent economic reforms, in reducing public sector debt and improving the flexibility and adaptability of the economy as a whole, will be evident for all to see. a monetary policy aimed firmly at price stability is of enormous benefit in weathering the storm. * * * nb this bis review is available on the bis world wide web site ( http : / / www. bis. org ). _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

our net investment income. this is not an immediate cause for alarm. as the world and particularly europe recovers, demand for our products and returns on our investments should increase. more competitiveness gains from the past depreciation may yet be realised, and in any event, unlike for much of montagu norman ’ s time, our exchange rate will remain flexible. nonetheless, sustained borrowing from abroad to consume at home is hardly a recipe for a balanced and sustainable expansion. borrowing to invest, improve productivity, competitiveness and incomes is. amidst much commentary about an unbalanced recovery, it should not be forgotten that business investment has accounted for more than a quarter of gdp growth over the past six months. the mpc ’ s forecasts rely on continued rapid growth of business investment over the next few years, leading to a revival in productivity and real wages, which in turn will allow consumption to grow without an unsustainable decline in household savings. creating the right conditions for investment is thus essential. in a world of corporate caution this will likely require interest rates consistent with our guidance. the bank is well aware that such a monetary stance could encourage other risks to develop. for instance, there is evidence of growing vulnerabilities in financial markets. across asset classes, implied volatilities are well below their long - term averages. spreads in high yield and peripheral bond markets have collapsed. and covenant - light loans are the new normal. while the banking system is much more robust to spikes in volatility, end investors may not have fully absorbed the extent to which financial reforms will distribute shocks across the financial system. this may be a case of still waters running deep – often the most dangerous time on the river. that is why an essential counterpart to our monetary stance is macroprudential vigilance and activism. nowhere is the need for that more acute than in the housing market. balance in housing across the country, house prices have risen by around 10 % over the past year, approaching their early 2007 levels. price inflation has broadened and accelerated across regions. expectations that prices will continue to rise are now most marked outside london. there have been some signs of a slowdown in activity, with mortgage approvals falling back to their mid - 2013 levels. the bank is watching closely to determine the extent to which this reflects an underlying slowing of housing demand. however, some of this likely stems from lenders adjusting to the financial conduct authority ’ s ( fca ) tough new mortgage