In communications on the level of the neutral real interest rate that pre-date my membership of the MPC, a distinction has been drawn between ‘capital R-star’ – a low frequency concept, which ‘looks through’ the impact of short-term economic shocks – and ‘little r-star’ – a higher frequency concept, which is influenced by shocks. 6. In the recent past, the MPC has assumed trend real GDP growth in the UK of around 1½%pa, albeit with the year-toyear evolution of potential GDP more modest in recent years owing to a series of adverse supply developments associated with inter alia Brexit and the Covid pandemic. Supply trends are of course uncertain and regularly reviewed by the MPC. An updated MPC assessment of those trends is scheduled to be published as part of its February 2023 Monetary Policy Report. 7. By the same token, other countries – notably the US – that are net exporters of natural gas (typically in liquefied form as LNG) have seen a substantial, mirror image improvement in their terms of trade. On this dimension, developments in most Western Europe countries (including the UK) are therefore quite different from those in the US. 8. Abstracting from monetary policy, the textbook optimal response to a (real) terms of trade shock would be to switch the composition of demand away from domestic to external sources while sustaining aggregate demand at levels consistent with the full utilisation of available resources, i.e. an ‘expenditure switching’ rather than ‘expenditure reducing’ response, typically associated with real depreciation.
As ever, we remain in the price stability business. The open question is how we will act in order to achieve the 2% inflation target sustainably, given the substantial challenges of the moment. That is the question on which I hope to shed some light this evening. Before developing this theme, let me start by recognising what a privilege it is to gather with the ‘Money Marketeers’ here in New York tonight. I would particularly like to thank Kris Dawsey for extending the invitation to speak. I understand that the objective of this longstanding group is ‘to foster greater understanding of finance and economics among senior practitioners and developing professionals [so as] to establish greater dialogue between the public and private sector on those substantive issues that move markets’. [1] Meeting that objective is a tall order. Today, I hope to make a modest contribution in support of this collective effort by exploring some of the similarities and differences between the outlook for monetary policy back home in the UK and the outlooks in other jurisdictions.