As I mentioned earlier, the UK economy has been growing rapidly. Over the past year, job creation has been the quickest on record, pushing unemployment down to 6.5 per cent. The economy is finally producing as much as it did on the eve of the crisis in 2008, and inflation is back near its 2 per cent target. In short, the UK economy is starting to head back to normal. 1  Bank of England founding charter, 1694. BIS central bankers’ speeches  1  As the economy normalises, Bank Rate will need to start to rise in order to achieve the inflation target. But the MPC has no pre-set course and the timing of any increases in interest rates will be determined by the data. In this regard, the Monetary Policy Committee (MPC) is balancing the implications for inflation of hard evidence of sustained economic momentum against conflicting signals over the degree of slack in the labour market. While some indicators such as wages suggest that there was more labour supply than we had previously thought, it is also true that spare capacity is being used up a bit more rapidly than we had expected. A key judgment for the MPC is when and to what extent these developments will translate into real wage growth, and in turn that wage growth into price pressures. Next month’s Inflation Report provides the next opportunity to update our thinking on these important questions. A durable expansion rests ultimately on moving from anaemic to strong productivity growth.
To do so, we must make global finance more resilient and fair. To make the system more resilient, funding and derivatives markets are being overhauled. Formerly risky areas of shadow banking, such as securitisation, are being transformed into sustainable market-based sources of finance. Financial institutions are being made stronger, with a seven-fold increase in the minimum capital requirements for the world’s largest banks. In the UK alone, major banks have raised over £ billion in new capital over the past few years and the Bank of England is now regularly testing their resilience to severe shocks. To make the system fairer, we should look to the insights of a third great Scottish figure, Adam Smith. Smith was a great advocate of competition. Its frequent absence in financial services has been corrosive. The most prominent examples are large, complex banks which privatise gains but socialise losses. The G20 summit later this year in Brisbane will be decisive in determining whether we can end too-big-to-fail. A more pernicious development has been the widespread rigging of some financial markets for personal gain. This has both diminished the effectiveness of markets and undermined trust in markets themselves. Adam Smith emphasised the importance of conduct, or what he referred to as “the established rules of behaviour,” by which “many men behave very decently, and through the whole of their lives avoid any considerable degree of blame.” 3 Those established rules of behaviour – social capital – underpin the functioning of the free market.