Rachel Lomax: The MPC comes of age Lecture by Ms Rachel Lomax, Deputy Governor of the Bank of England, at De Montfort University, Leicester, 28 February 2007. I am very grateful to Gareth Ramsay for his help in preparing this speech, and also James Proudman, Tony Yates and other Bank colleagues for their help in preparing this speech, and to a number of colleagues at the Bank of England for useful comments. * 1  *  *  Introduction  It’s a great pleasure to be in Leicester tonight, particularly given my long association with De Montfort University, as a Governor. Tonight I want to focus my remarks on the Monetary Policy Committee, which is ten years old this year. This is a blink of an eye in the life of the Old Lady of Threadneedle Street as she approaches 313. But UK monetary policy frameworks have lived dangerously and died young. For them, ten years is good going. To mark the occasion the Treasury Committee has launched a special enquiry. An impressive weight of written evidence has already been published, including a detailed review by the Bank of England. Everyone agrees that the UK has experienced an unprecedented degree of economic stability over the past decade. The average rate of inflation has come down from nearly 10% in the seventies and eighties, to 2.5% since 1993, and the volatility of inflation has fallen very sharply. At the same time, output growth has been higher on average and less volatile.
To illustrate the problem, let’s begin by examining net debt flows in the private nonfinancial and government sectors over the last 10 years. As can be seen in Chart 1, borrowing by the  2  BIS central bankers’ speeches  private nonfinancial sector rose rapidly from 2003 to 2006 and remained high until the crisis hit. Then borrowing turned negative as new loans were more than offset by repayments and write-offs. Only recently has borrowing turned weakly positive. Chart 2 illustrates how the stock of net debt in different sectors of the economy evolved throughout this period. It shows that much of the credit boom was concentrated in the household sector. The business sector only experienced a surge from 2006 onward. During the boom, leverage also increased in the financial sector. As the boom proceeded, credit losses were low and earnings strong. But once the bust began, this dynamic reversed. Credit losses at financial institutions surged and the sector was forced to deleverage rapidly and raise new capital. This resulted in a significant contraction in the availability of credit and was a major direct shock to the global economy. Crucially, this tightening of credit standards exacerbated how much many households and firms had to deleverage. It also crimped demand, inhibiting economic, employment and income growth, which in turn made the deleveraging process more challenging.