credit. finance is the oil that lubricates the allocation – and so, in current circumstances, reallocation – of capital in our economy. this is manifestly affecting smes. my hunch is that housing market conditions are a factor too. as long as anyone can remember, a crucial element of sme finance has been the capacity of entrepreneurs to pledge their home at the outset of a loan or, contingently, if and when their business hits choppy waters. uncertainties about the path of house prices do not make that a comfortable backdrop for lenders in current conditions. bis central bankers ’ speeches rebalancing will affect labour market conditions too. perhaps the greatest surprise to the mpc over the past few years has been subdued productivity growth. one could think of this as firms maintaining employment at higher levels than would have been predicted given the fall in the level of output. labour hoarding. that squares with business managers explaining that they worry about “ structural ” skill shortages and so are loathe to lose employees who they will need when their markets recover. but it does not really square with surveys of business conditions reporting that firms say they are carrying relatively little spare capacity. we have scratched our heads about this. one possible explanation is that, in an economy based heavily on the production of services, firms have been putting their teams to work on marketing and sales to drum up business against a backdrop of weak overall demand. those teams may well be working hard. in that case, it may not feel to managers, when filling in surveys, as if they have lots of spare capacity, but, as i have described it, those staff would be working on inputs rather than outputs – making productivity across the economy as a whole look weak. nor does labour hoarding square obviously with relatively healthy growth in private sector employment over 2010 and the first half of 2011, before the recent slowing. in our internal debates, i have posited that this could be a symptom of the economy ’ s necessary rebalancing. firms facing expanding markets and demand may be hiring. whereas, against a backdrop of a very low policy rate and some forbearance by banks, individual firms in contracting sectors could be holding out, either not recognising that their market is contracting or believing and hoping that it will be their competitors rather than themselves that end up cutting capacity or closing. it can be argued against that that rising employment, and weakness in productivity, is spread fairly

paul tucker : a few remarks on current monetary policy in a rebalancing economy speech by mr paul tucker, deputy governor for financial stability at the bank of england, at the joint 1900 / city club lunch, london, 22 november 2011. * * * the outlook for economic activity has deteriorated over the past few months. the mpc has responded with a further round of quantitative easing to underpin demand, and so reduce the chance of inflation undershooting our target in the medium term. monetary credibility : accommodating the price level shocks our ability to provide and sustain that stimulus depends absolutely on the credibility of our commitment to the 2 % inflation target. if our credibility were to slip and medium - term inflation expectations were to rise, we would have to run with a tighter monetary stance than otherwise in order to put the genie back into the bottle. the committee ’ s most important judgment over the past year or so has, accordingly, been that the elevated rate of inflation, now about 5 %, is temporary. we have had conviction in that judgment because of the observable upward impulses to the price level from sterling ’ s depreciation, the vat increase, and the rise in commodity prices. there is occasionally a rather odd debate about whether the mpc could have avoided the consequent increase in inflation. big picture, the answer is that we could have done, but we chose not to. we have, in effect, accommodated something like half of the cumulative impulse to the price level. we could have chosen instead to offset the price level shocks by running a much tighter monetary policy. had we done so, spending in the economy, activity and employment would all have been squeezed. conditions have anyway been difficult for many households due to the squeeze on real incomes, but i think it would have been worse if we had tightened policy. our ability to sustain exceptional monetary stimulus has, i should reiterate, depended on the credibility of our commitment to low inflation over the medium term being preserved. i worried that chatter in the markets in late 2010 / early 2011 marked incipient signs of fragility in that credibility. that was one of the reasons why, at the beginning of this year, i had expected to vote for an increase in bank rate at our february meeting. the weak output data for q4 2010 published shortly before that meeting changed my mind, and the committee ’ s course, as they revealed that the economy was softer than i had thought. escape