More competitiveness gains from the past depreciation may yet be realised, and in any event, unlike for much of Montagu Norman’s time, our exchange rate will remain flexible. Nonetheless, sustained borrowing from abroad to consume at home is hardly a recipe for a balanced and sustainable expansion. Borrowing to invest, improve productivity, competitiveness and incomes is. Amidst much commentary about an unbalanced recovery, it should not be forgotten that business investment has accounted for more than a quarter of GDP growth over the past six months. The MPC’s forecasts rely on continued rapid growth of business investment over the next few years, leading to a revival in productivity and real wages, which in turn will allow consumption to grow without an unsustainable decline in household savings. Creating the right conditions for investment is thus essential. In a world of corporate caution this will likely require interest rates consistent with our guidance. The Bank is well aware that such a monetary stance could encourage other risks to develop. For instance, there is evidence of growing vulnerabilities in financial markets. Across asset classes, implied volatilities are well below their long-term averages. Spreads in high yield and peripheral bond markets have collapsed. And covenant-light loans are the new normal. While the banking system is much more robust to spikes in volatility, end investors may not have fully absorbed the extent to which financial reforms will distribute shocks across the financial system.
5  4  Ten years ago, former MPC member Kate Barker estimated that construction of around 260,000 homes a year would be necessary to contain real house price growth at 1 per cent per annum (Barker, 2004). Far fewer have in fact been built in the years since – just 110,000 in 2013. Because housing demand tends to rise more than oneBIS central bankers’ speeches  To be clear, the Bank does not target asset price inflation in general or house prices in particular. It is indebtedness that concerns us. This is partly because over-extended borrowers could threaten the resilience of the core of the financial system since credit to households represents the lion’s share of UK banks’ domestic lending. It is also because rapid growth in or high levels of mortgage debt can affect the stability of the economy as a whole. An economic expansion is more precarious if there are a large proportion of heavily indebted households. History shows that the British people do everything they can to pay their mortgages. That means cutting back deeply on other expenditures when the unexpected happens, potentially slowing the economy sharply. That’s why recessions that follow rapid credit growth tend to be deeper and longer lasting. It is for these reasons that the Bank of England’s Financial Policy Committee (FPC) is mandated to address systemic risks arising from unsustainable levels of debt, leverage or credit growth.