Mervyn King speaks at Nottingham CBI dinner

Mervyn King speaks at Nottingham CBI dinner; - From the early 1990s to the start of the financial turmoil in 2007, total debt in the UK relative to GDP almost doubled. Around two-thirds of the increase in total debt was accounted for by lending to the financial sector. A marked expansion in debt of the financial sector also occurred in the United States and the euro area. - The Bank did not stand idly by during this period. The Monetary Policy Committee set Bank Rate to achieve the inflation target. Monetary policy – here and in our major partners – was successful in controlling inflation and maintaining economic stability. From the early 1990s until the onset of financial turmoil in 2007, output growth, both here and in the industrialised world in general, was close to its long-run average. Moreover, through our regular publications and speeches on financial stability the Bank highlighted the dangers posed by the growth in the size and complexity of the financial sector. Nevertheless, it is clear that policy did not succeed in preventing the development of an unsustainable position. - Some have suggested as a result that Bank Rate be directed not only at meeting the inflation target but also at preventing excessive increases in debt and asset prices. Leaving to one side the feasibility of targeting the latter, the obvious question is how one can meet two objectives with one instrument. The answer of course is by accepting a trade-off between the two objectives. But why should we accept unemployment or high inflation in order to reduce financial imbalances? It would be more sensible to use Bank Rate for its traditional task of targeting inflation to maintain a balance between demand and supply in the economy, and to create a new instrument to limit the build up of debt. - What is required is an additional policy instrument to stabilise the growth of the financial sector balance sheet. There is an active international debate as to the optimal design of su...