increase, to reduce again. if we care about the medium term path for the economy, these are all relevant considerations. at the same time, the demand for credit was exceptionally high, and indeed picked up from mid 2003 to about october, after a number of years of sustained strength. few people are now completely sanguine about the potential problems this could bring if it continues. there remains, as i have said, a good deal of debate about whether, and how aggressively, monetary policy might apply high interest rates to handle an asset boom. but it is hard to see a case in such circumstances for holding rates unusually low, in the absence of other powerful contractionary forces. it certainly seemed to us imprudent, to say the least, to leave interest rates so low, given that the international factors which had held them there were fast evaporating. a risk - management approach to policy pointed to the advisability of removing some of that stimulus. it is possible to argue that a central bank following a narrow inflation - targeting approach could have waited longer before raising interest rates. but that view supposes a rather mechanical and short - term approach. at the risk of labouring the point, our approach has never been like that, and isn ’ t now. it has always stressed the desirability of taking account of things other than just the narrow short - term inflation outlook where it was sensible to do so, with the proviso that medium - term inflation performance be in line with the announced objectives. hence the words ‘ on average, over the cycle ’ or other similar language, have always been a feature of our inflation target. a decade ago, this language was far too vague for the tastes of many critics, who doubted we would have the resolve to keep inflation low. but the record shows that the system has worked well. sensibly operated, it will continue to do so. conclusion good policy uses the best available analysis, systematising what we can know about the economy from past experience, without assuming that the future will be like the past in every respect. it must avoid both the hubris of thinking we know everything and the despairing assumption that we know nothing. the apparatus i have described above has, in my view, been useful in helping sensible thinking about policy. but we shouldn ’ t get too carried away by any sense of numerical precision, or become too wedded to the idea that forecasts, or estimates of the neutral interest rate - or

would like to reflect on each of these three questions, highlighting the progress that has been made and offering a few thoughts on some of the work that remains. resilience first, to the issue of resilience. looking back at the experience of the past 20 years, i am struck by the fact that large financial disturbances are repeatedly caused by the same factors. three stand out : i. poor asset quality, particularly in the area of commercial property development ii. inadequate attention to liquidity management iii. the build - up of unhedged foreign currency exposures. bis central bankers ’ speeches not surprisingly then, it is these areas that have received the most attention from the international regulatory community. over recent years, the most extensive of the global reforms has been the basel iii package. this package means that, globally, banks now have more and better - quality capital, so they are better placed to absorb losses. in addition, minimum standards for banks ’ liquidity management are now more rigorous and transparent. the stronger liquidity standards also help reduce vulnerabilities from foreign currency exposures, by giving supervisors new ways of monitoring liquidity requirements on a percurrency basis. other reforms have helped increase resilience in other parts of the financial system, including derivative markets and shadow banking. but the reforms remain incomplete and challenges remain. the last chapter of the basel iii package is being finalised this year. while some of the reforms have helped address the toobig - to - fail problem, there are still considerable challenges in developing recovery and resolution plans for the largest global financial institutions. and, in the area of over - thecounter ( otc ) derivatives market reform, legal restrictions sometimes still make it difficult to share information across borders. the basel committee and the financial stability board are both reviewing the overall calibration of the reforms. this is essential because with so many new metrics and requirements, we need to ensure they do not interact in unintended ways. of course, some of the effects that market participants comment on are intended. maturity transformation has become more expensive. so too, has providing market making services in some financial instruments, generating concerns about a lack of liquidity in bond markets. more broadly, the cost of many forms of financial intermediation across banks ’ balance sheets has become more expensive. the promised benefit of this additional expense is that the system is now more stable. but we need to keep an eye on this trade - off, because