We need, therefore, to assess the extent to which spare capacity is dragging down on prices. In this particular context, we can take some comfort from the growth of earnings (wages and staff bonuses etc) being subdued, below 2%. But with productivity growth having been incredibly low for a while now, it is possible that the rate of earnings growth consistent with achieving the 2% inflation target has been below the 4–4.5% we typically used as a rough benchmark in more normal conditions before the financial crisis and subsequent recession. How and when businesses in aggregate will again generate productivity improvements will be at the heart of the Committee’s deliberations. To be clear, this is about the path inflation takes back to target, not whether it will return to target. The MPC will ensure that it does return to target and that medium-term inflation expectations are anchored to the target. Conclusion To conclude, UK companies are having to adjust to a different pattern of demand, to profound shifts in world trade and prices, and you are having to cope with this while the financial system both recovers itself and adapts to new “rules of the game”. Given some threats to stability linger, the Financial Policy Committee’s primary focus has to be on encouraging continued progress in building resilience in the banking sector. That will pay dividends in the longer run.
It would not be sensible to relax capital requirements when the unusual hazards persist. Today, gradually strengthening capital adequacy, and so building resilience, is best not only for stability but also for sustaining the recovery through what might lie ahead. Monetary policy With government needing to set fiscal policy in order to repair the public finances, that means that the burden of stimulating our economic recovery falls mainly to monetary policy. Bank Rate is at, effectively, zero. And the Bank has provided further stimulus, via quantitative easing, in order to underpin demand, and so guard against inflation being persistently below our 2% target further down the road. For the economy as a whole, that has bought time to smooth the adjustment. For firms, it has reduced the cost of capital and the weight of debt burdens. The equity prices of leveraged firms have generally risen more than the market as a whole. Easy monetary conditions no doubt go some way to explain why more firms haven’t failed; and why the Bank has received few approaches, under what is still known as the London Approach, to help banks and firms keep talking when a co-operative solution is within reach. In all this, the Monetary Policy Committee faces a delicate and unavoidable balancing act.