On the supply side, as the world economy recovers, the balance of production will continue gradually to shift towards exporters and towards firms which, given sterling’s large depreciation since mid-2007, can now compete somewhat more readily against importers. For sectors primarily serving domestic markets, the adjustment is more challenging. Some face both higher costs for imported inputs to production and weaker demand – not just temporarily but persistently – for their final output. On the ugly side of this rebalancing, there has already been an increase in vacant properties on the high street, which is also facing structural change due to on-line shopping. Some of those properties will no doubt be converted to other uses over time, but I know it will not be easy for the firms affected or for their employees. Company insolvencies have ticked up, and will likely continue to do so for a while. Credit supply and the corporate sector Recovery will come, and the necessary adjustments will occur, over time. But it is made harder for you by the problems in the financial system. You have faced first tightening, then in late 2008 frozen, and now a prolonged period of tight credit conditions. Many of you must have worried at times about the safety of your cash balances and other liquid investments. You will have wondered about the soundness of the counterparties you use in the capital markets.
Better, sometimes, to try to address a bubble at its source. This could be unpopular, but such is the job of taking away the punchbowl. We will explain our decisions. I cannot emphasise enough that the FPC will not indulge in attempts to micromanage the banking system or the allocation of credit. Nor will we be excessively activist, trying to fine-tune credit policy. This is about stability, which is an absolute precondition for steady improvements in economic activity and employment. The goal is to make the financial system resilient, to contain destructive “busts”, and to do so without impairing the contribution that the financial sector makes to the economy’s medium-term growth. Can the FPC help right now? The benefits of the new regime for stability will take time to come through. That might leave you asking what the FPC could do to help right now. Indeed, with credit conditions so tight, it has been asked whether the FPC should be easing regulatory constraints on banks. The aim would be to encourage them to loosen lending conditions, helping recovery. And, it is suggested, that would be consistent with the FPC’s remit because it could reduce threats to stability from the risk of borrowers defaulting. At its September 2011 meeting, the FPC concluded that such a step would in fact be counterproductive – endangering stability and jeopardising recovery. Given the precarious starting position of UK banks when the crisis broke, their capital adequacy is still being rebuilt. And banks are still operating in an extraordinarily risky international environment.