In March this year, inflation rose to 3.1% and I wrote an open letter to the then Chancellor explaining why and what we were doing about it. Over the past 12 months, we have raised Bank Rate by one percentage point. And, notwithstanding some claims at the time of the open letter, inflation has since fallen back quite sharply, mainly as retail gas and electricity prices have stopped rising and, more recently, fallen. CPI inflation was, in August, a fraction below the 2% target. The challenge now for the Monetary Policy Committee is to keep it there. The current turmoil in financial markets is not over. Conditions have eased a little – share prices have recovered and interbank interest rates have fallen back. Indeed, spreads between interbank rates and anticipated central bank interest rates are now lower in the UK than in the euro area or United States. But for the moment, some markets remain virtually closed. And even as they re-open, there will not be a return, I hope, to the excessive risktaking – and associated rapid expansion of credit – of the past few years. With investors more wary of risks, banks will find it harder to raise funds. So credit will not be so readily or cheaply available to businesses and households. As we said in August, pressures on capacity mean that output growth needs to slow moderately over the next year or so if we are to continue to meet the inflation target.
Mervyn King: Monetary policy developments Speech by Mr Mervyn King, Governor of the Bank of England, at the Northern Ireland Chamber of Commerce and Industry, Belfast, 9 October 2007. *  *  *  Three weeks ago, thousands of depositors queued on the streets outside branches of Northern Rock to take their money out. Those scenes, broadcast around the world, were shocking. How did they come about and how can we prevent them in future? My focus tonight will be on why the incentives facing banks, investors, and depositors led them to behave as they did. Most of what happened can be understood in terms of those incentives. And, if we are to create a structure for our banking system so that such scenes are not repeated, we must ensure that the temporary measures put in place in recent weeks evolve into permanent reforms in the coming months. But I want to start with the story of how these events came about. It begins in the international capital markets. One of the most remarkable changes in the world economy over the past decade has been the fall in interest rates. Some of that stems from the fall in inflation as central banks have regained control after the Great Inflation of the 1970s and 1980s. But even adjusting for inflation, low-risk borrowers have been able to borrow on world capital markets at very low rates. In the UK, the yields on 10-year inflation-protected government bonds have, in the past year, been close to 1%.