BIS Review 18/2005  5  Last year we encountered a similar situation to that today, when the Bank's forecasts suggested that inflation would undershoot the target for almost the entire two-year period ahead, even though it was estimated to be on target in two years’ time. One reason we decided not to cut rates then – a reason that is still valid today – was that we saw that demand was growing strongly already. So, monetary policy appeared to have had the desired effect. This development has been reinforced now that business investment seems to have begun to pick up in earnest and that private consumption is also stronger. In other words, economic activity is already firm and GDP growth is above what is judged to be sustainable in the long term. Given that, a rate cut now would probably mean in practice that we would have to tighten policy more quickly in the future. So it is a question of trying to avoid excessive fluctuations in the real economy and interest rates. Another, partly related aspect that we also have reason to consider when making decisions about the repo rate is that the low inflation is due in large measure to markedly weak price developments for certain products as a result of increased competition, e.g. in the retail food trade and textile industry. It is probably not always prudent to fully counter this through highly loose policy that would drive up domestic demand.
The new thing would be to combine those ingredients together, at scale. The question of whether to do so is complex, and beyond the scope of my remarks today. The UK will publish a consultation on this issue later this year. But the implications for central bank balance sheets will also depend heavily on how any CBDC is designed: on who can hold it, where it can be used, how much can be held, and whether it is interest-bearing (Table 1). The Bank of England’s work in this area is available at: UK central bank digital currency | Bank of England. 1  Bank of England  Page 3  Source: Bank of England  Design choices that placed the economic features of CBDC close to today’s banknotes might have relatively limited implications for central bank balance sheets, at least in normal economic conditions. Choices that positioned the economic features of CBDC closer to today’s retail commercial bank deposits could have a more material impact. To give some sense of potential scale, Chart 1 compares two stylised benchmarks – the stock of banknotes; and 20% of retail commercial bank deposits2 – to the size of central bank balance sheets between the period before the Global Financial Crisis and today. In the UK, the upper end of that benchmark range is nearly half the size of the Bank of England’s balance sheet today, and six times that in 2007.