4  BIS Review 112/2008  rate is a fully satisfactory summary statistic; other rates fall into line through arbitrage, with differences reflecting risk premia. More practically, it can typically be assumed that the rates charged on private sector loans are maintained at fairly stable spreads relative to the riskfree yield curve (ie given the expected path of the policy rate). And, related to that, it can also typically be assumed that the degree of credit rationing in the economy is broadly constant over time. Obviously, neither of those things is true at present. The most unusual, and stretched, circumstances lie within the global financial system itself. The premium on unsecured interbank lending has risen (Chart 1); and growth of such lending has slowed. This reflects a desire to hoard liquidity in a hazardous environment; and heightened aversion to taking on unsecured credit exposures for term maturities. Banks are, in consequence, deleveraging 7 their balance sheets. Broadly, they can do so in two ways – raise extra capital, or shrink (the pace of growth in) their balance sheets. Both have been underway. The balance sheet shrinkage is reducing the supply of credit to households and firms. But there is differentiation across the banking industry, according to size and strength. In that environment, spreads on corporate bonds are higher. Many corporate and household lending rates have been affected by the rise in Libor relative to risk-free rates. And retail rates – for both loans, and some deposits – have risen relative to the relevant risk-free rate.
And in the US, the housing market has not yet obviously stabilised, which is probably a precondition for broader recovery there. Domestically, the output data have been on the soft side, moving into line with the battery of surveys and the Bank’s regional Agents. The labour market also appears to have softened, with unemployment rising and fewer vacancies advertised. It is perhaps not surprising that, compared with recent slowdowns, there should be less hoarding of labour if firms expect the adverse environment to persist for a while; and with tighter credit conditions, stretching  the export-oriented euro area would be adversely affected, and the UK with it. But, seriously, should the UK cut the policy rate to head off the risk of a dent to output from a dollar collapse that hadn’t yet occurred? I don’t think so. 2  BIS Review 112/2008  working capital, making it harder for firms to finance the retention of a less-than-fully-occupied labour force. In the manufacturing sector, input and output price inflation have edged down very slightly. In the service sector, the data are less timely, though surveys have started to indicate some slowing in the pace of inflation. Commodity prices – not only energy, but food too – have continued to fall, perhaps reflecting the effects on global demand of the earlier price rises and the reduction of subsidies by a raft of emerging-market countries. Equities have fallen around 3%.