These two objectives contain the same “subject to that” language used in 1997 in the Monetary Policy Committee’s objectives. It means that there is a hierarchy of objectives which the FPC must observe. But, two further points are relevant here. First, resilience and economic growth interact, so they are not fully independent. An economy that displays stable growth is more likely to have a stable financial system, and vice versa. Second, policy is necessarily forward-looking, in that we are concerned with stability and growth in the future, since today’s outcomes are so to speak, “baked in”. This means that, in thinking about the hierarchy of objectives, in my view we have to take a forward-looking assessment of the probability of success, rather than saying we should complete one and then do the other. Financial stability is more complicated than monetary policy in at least one respect, namely that it does not reduce to a single target expressed as a number. Rather, it comes in the form of recommendations, in the plural, expressed as words. You would think that as central bankers and public officials we should love that, spending our time crafting language in a form that only we really understand. Let’s not get carried away here – there is a danger that  BIS central bankers’ speeches  1  by doing so we create uncertainty about our intentions. This danger of creating uncertainty exists because we are finding our way in a new and difficult area of policy.
Nevertheless, several risks should be highlighted: that of a sudden drop in US consumption in the wake of the problems in the property market; that of a sharp increase in commodity prices; that of a return to volatility on financial markets, after several exceptionally calm years; and, linked to the latter, that of a disorderly adjustment of exchange rates triggered by the build-up of international imbalances. The second concern relates to the extremely rapid growth of monetary and credit aggregates in the euro area. The annual growth rate of M3, which was below 6% in 2004, gradually accelerated and currently exceeds 10%. Loans to the private sector also continue to expand by more than 10%. Structural changes in money and credit demand – linked to financial  BIS Review 92/2007  1  innovation – may partly account for this acceleration. However, these developments must be closely monitored in view of their implications for monetary stability and that of financial systems. During 2004 and 2005, household borrowing was the primary source of credit growth; in 2006, this was replaced by lending to enterprises, in line with the economic recovery and the rise in – often highly leveraged – company buyouts. The strong profits and financial soundness of firms facilitate and sometimes encourage increased borrowing, which is then presented as “optimising” their liability structure. But balance sheets are weakening and difficulties could appear in the event of a turnaround in the business cycle.