Only last November, the Monetary Policy Committee concluded that it was very unlikely that business confidence would bounce back as it did in 1998. But the quarterly survey of the British Chambers of Commerce, published last Thursday, showed that manufacturing confidence had returned to levels last seen in 2000, and there were further  BIS Review 26/2002  1  improvements in the services sector. And the CBI survey, published this morning, showed the highest level of business optimism for eight years. So the recent news has been encouraging. It is still too soon though to be confident that recovery is entrenched. The sharp inventory run down of last year appears to have come to an end, but investment has not yet picked up, either in the UK or the US. And consumption, which has remained strong, may well decelerate. So, as the G7 Ministers and Governors noted in their communiqué on Saturday, downside risks to the world economy remain. These risks, and the current account imbalances I referred to before, mean that we need to be prepared for the possibility of large changes in exchange rates, although no one can predict the magnitude or timing of those changes. The second price I want to consider is the oil price. Yesterday the spot price of Brent crude closed at $ a barrel, up 34% from the level at the time of the Bank's February Inflation Report. Volatility of oil prices has been a feature of the past few years.
We will then be back to managing monetary policy through the more traditional tool of the overnight lending rate that anchors the yield curve. Enter forward guidance This is no small matter. Quantitative easing has made life easy not only for corporate treasurers and homeowners and consumers burdened by debt, but also for money market operators. It has run up the price of stocks and bonds mostly in straight-line fashion, and it has taken volatility out of the marketplace, allowing market operators and their clients to profit with little effort. The question of when and under what conditions the FOMC will begin to raise the base rate off the floor is understandably of intense interest. For example, every quarter, FOMC participants each provide forecasts of the year in which they presently think the target overnight rate will be raised, based on what they individually consider to be the proper conduct of monetary policy. This has given rise to what I consider a rabid focus on the economic projections, or “dots,” that accompany our FOMC statements on a quarterly basis. Monty Python could almost have written a sketch on the pundits’ preoccupation with the dots. 4 Truth be told, although many of us have econometric models and all of us have a phenomenal team of economists who help us develop our projections, these estimates are, in the end, largely guesswork. Especially the further out in time they go.