It is not a threat - if anything it is a promise. It’s what our mandate from the Chancellor requires us to do for the very good reason that low, stable, inflation is both a necessary condition for and a reflection of overall macro-economic stability over the medium and longer term, which is clearly what we all want to see. Given the qualifications, it is not a promise on which we will necessarily deliver immediately. We start from a position in which inflation is somewhat below our symmetrical target, and there is little evidence at this point of significant inflationary pressure; wage pressures, in particular, remain relatively benign despite the robust labour market - and it is crucial that that should continue. That gives us a certain amount of time to assess the unfolding evidence on the evolution of both the external situation and the strength of overall domestic demand, though one can legitimately debate just how much risk we can afford to take by waiting. But if and when we do decide to act, you should see that as a sign of the strength of the economy rather than as evidence of weakness. Indeed my message to you this evening is that, after a difficult passage over the past twelve months, we can reasonably now look forward to more favourable offshore winds in the period ahead, opening the way to somewhat stronger and better balanced overall output growth, but with inflation remaining close to target.
Last year I pointed out that sterling’s exchange rate was at a 15 year low against the dollar, but close to its peak against the euro. In overall terms sterling’s effective Exchange Rate Index against currencies generally had been relatively stable - at around 105 plus or minus 5% - for most of the past 2-3 years. That pattern of  BIS Review 40/2002  1  exchange rates made life particularly difficult for the euro-exposed sectors or our economy, and, given that the eurozone represents over 50% of our external trade, contributed significantly to the imbalance within our economy. Happily, from our point of view, and indeed in the context of the global external imbalance, we have recently seen a significant strengthening of the euro against the dollar, and to a lesser extent against sterling, which will help to ease some of the earlier tensions. Sterling’s exchange rate has recently moved to two year high against the dollar and nearly a three year low against the euro. Sterling has consequently also weakened in overall, effective, terms, from some 107 some months ago to currently around 103 - which is still within the earlier range. It is frankly anyone’s guess whether the recent pattern of exchange rate movements will be extended, but what has happened so far, taken together with the improved prospect for global demand, suggests that the adverse external factors weighing down the UK economy over the past two years or so should now diminish.