China’s growth quickened to around 12 percent in the first quarter of this year, the fastest pace in almost three years, driven by stimulus spending and a credit boom. Having said that, we are also witnessing some countries, especially in the Euro area, experiencing great economic difficulties due to debt service problems arising from running several years of large fiscal deficits.
Given the stronger profile of economic activity relative to January, Governing Council was very focused on the third issue: how much excess capacity remains in the economy. We use a couple of different methods to gauge the amount of excess capacity, which gives us a range of estimates of excess supply. Evidence from inflation data is also consistent with material excess capacity remaining.