And that’s probably because the UK economy has weathered the squalls of the past few years rather better than both the US and the euro area. Since 2000, we have grown more strongly than the euro area, and more steadily than the US; indeed we are alone among major industrial countries in not having experienced a single quarter of falling output for more than a decade. As a result the UK emerged from the slowdown in the world economy with less slack than other economies. That is the key reason why we were the first to start raising interest rates last November, when world activity started to pick up and demand at home accelerated. Since then, a number of other countries, including the US, have begun to raise their rates to more normal levels. When I joined the Monetary Policy Committee a year ago, both the Fed and the ECB had just cut their interest rates to exceptionally low levels, reflecting real concerns about the strength of the world recovery. Activity picked up sharply in the US last autumn, but the mood only changed decisively early this year, when a million new jobs were created in just three months. It is now clear that a broad based world recovery is well under way, led by the US and Asia, especially China, but spreading to other regions. The news from Japan is more encouraging than it has been for over a decade.
As such, a key lesson from the financial crisis is the need to expand the range of instruments available to policymakers, so they are better equipped to ensure the resilience of the financial system. This missing instrument problem provides the backdrop to the Government’s announcement earlier this year that it intends to create a new policy committee in the Bank – the Financial Policy Committee – which will have responsibility for conducting macroprudential policy. In 2010, quantitative easing was entered into the Oxford Dictionary of English, along with chillax and defriend (don’t ask!). I predict that 2011 may be the year of macroprudential policy. The legislation determining the precise tools and objectives of macroprudential policy is still to be enacted. But as the Governor recently emphasised, the over-riding objective is to ensure the resilience and stability of the banking system. 4 If successful, macroprudential policy will represent a significant advance. As we have seen repeatedly through history and across countries, banking crises come hand-in-hand with deep and costly recessions. Promoting the resilience and smooth functioning of the financial and banking system in bad times as well as good would contribute greatly to our future economic stability. But it would be wrong to conclude from this that macroprudential policy is likely to solve the missing instrument problem entirely. That is for at least three reasons. First, macroprudential policy is not the instrument that will solve the problem of global imbalances.