And we have a very international business community, reflecting the UK’s position as a major trading and commercial centre dating back to the late 17th century, when the Bank of England was founded, and the leading role that Britain played as the pre-eminent industrial power in the 18th and 19th centuries. When I joined the Committee in 2006, it struck me that most of the shocks and disturbances that the MPC had had to deal with – even in the less turbulent times of its first decade – had emanated from the global economy. The MPC came into being in 1997 just as the Asian crisis was unfolding, and the response to that period of global turbulence was a key issue dominating the first two years’ of the Committee’s life. Then followed the dotcom boom and bust centred on the US economy and the global political turbulence following the 9/11 attacks, including the effects of war in Afghanistan and Iraq. Then, as the global economy recovered in 2003/4, the emerging issue was the upward pressure on oil and commodity prices and these global inflationary forces were a major preoccupation until the middle of 2008 and have re-emerged as a serious concern as the world economy has recovered from recession. The global financial crisis from 2007 to 2009 was the most extreme of these international economic shocks affecting the UK economy.
But the longer it persists, the more likely it is that sterling prices will adjust to euro prices, creating the potential for quite long term impacts on UK inflation relative to the euro area. That is what we appear to be seeing at the moment, with the historic relationship shown in Chart 6 suggesting that UK inflation could run 1 to 2 percentage points above euro area inflation for a considerable while unless there is some noticeable appreciation in the value of the pound. The counterargument to this view is that the recent substantial depreciation of the pound against the euro and other currencies is needed to support a rebalancing of the UK economy and sustain the growth of UK manufacturing and other internationally competitive sectors of the economy. But the extent of the depreciation of sterling since 2007 has been much greater than we have seen in previous rebalancing episodes, such as the mid-1990s – which raises the question whether sterling has fallen much further than needed.5 And it is not clear  5  8  See Sentance (2011) for a comparison of the recent fall in sterling with previous episodes. BIS central bankers’ speeches  that the export-based manufacturing activities which could benefit from a large depreciation have the capability to respond quickly by scaling up output – particularly when their demand is already being boosted by a recovery in global demand.