We find ourselves nevertheless - not for the first time - in something of a quandary. The key questions confronting us then are: First - To what extent do we expect the gradual global recovery - which is critical for our manufacturing sector - to be sustained? 2  BIS Review 59/2002  Secondly - Depending on the answer to that, to what extent do we expect the consumption growth, that we have recently been relying upon to keep overall, aggregate, demand increasing, in line with our underlying supply capacity, to continue to sustain our overall economy of its own accord? and Thirdly - Depending on the answer to that, how much risk - of an abrupt retrenchment by consumers, and a significant shortfall on our inflation target, further ahead - would we be taking, and should we take, by cutting interest rates further now, to sustain consumer demand at the expense of a further build up of household debt and continuing increases in house prices, in order to maintain the growth of the overall economy? These are all difficult questions of degree. But you can be sure that my colleagues on the MPC will continue to monitor both the global and the domestic situation with their usual vigilance - and with an open mind. There’s no doubt that these are challenging times for all of us.
By the early summer both the MPC and financial markets were contemplating the possibility that we might soon need to act to moderate the growth of domestic demand, if that did not happen of its own accord, in order to accommodate a pick up in external demand. But we had not reckoned with the further nervous breakdown suffered by international equity markets during the summer! This seemed to be largely unconnected with developments in the global economy where a gradual recovery - including a gradual recovery in manufacturing output - seemed to be continuing, even if the pace of recovery was slower than was earlier anticipated. In part it no doubt reflected a belated correction of earlier “irrational exhuberance” but it seemed to be exaggerated by fears of possible further terrorist attacks following on from 9/11, by a series of corporate governance and accounting failures in the US, and by the possible implications of war with Iraq. But whatever the causes, the sharp further falls in equity prices have given rise to concerns about the strength of business and consumer confidence, and to doubts as to the sustainability of the global recovery. Internationally, and here in the UK, both in financial markets and within the MPC, the monetary policy debate has shifted back to the possible need for further monetary stimulus . One helpful consequence of this is that market interest rates have in fact fallen significantly, which will help sustain the recovery.