Share prices have fallen by around 20% since their peak in March 2000; and technology stock prices have fallen even more, by 50%. Forecasts for economic growth in the United States for the coming year are still being revised down and are only one half of their levels of a few months ago. Equally, only a few months ago, some currency traders were openly deriding the euro. The euro reached a low of 0.82 to the dollar - the lowest level for the euro or its antecedents for over 15 years. Since then, however, the euro has recovered, and the euro economy itself appears to be relatively stable. In the other major industrialised part of the world economy, Japan, output has barely risen in recent years. Real GDP in Japan has grown by only just over 1% a year over the past decade, compared with over 4% a year over the previous ten years. Unexpected changes in the economic weather have also had a significant impact on the oil market. Oil prices rose from below $ a barrel (for Brent crude) in December 1998 to a recent peak of over $ last September, falling back to around $ in December only to rise again to around $ a barrel. The standard deviation of daily changes in oil prices rose by a factor of three from the first half of 1999 to the second half of last year: an indication of just how much volatility has risen. Moreover, volatility has not been confined to the industrialised world.
The past five years have seen a number of damaging financial crises that have afflicted emerging market economies. Sudden reversals of short-term capital flows to some of those economies resulted in crises that led not only to deep recessions and sometimes political crises, but also a renewed debate about the role of the IMF in providing bailouts to some of these countries. Despite this volatility in international economic conditions the British economy, to date, has experienced greater stability. At first sight, this is encouraging. The UK has weathered some of the recent international economic storms, and achieved a post-war record of uninterrupted economic growth, falling unemployment, and inflation lower and more stable than for a generation. But no two storms are ever the same. Do the clouds on the international economic horizon threaten our economic stability at home? We cannot know. Rest assured that the Monetary Policy Committee will always act to maintain stability by keeping inflation on track to meet the target of 2½%. But the recent stability of inflation owes a good deal to the fact that economic shocks from overseas have tended to offset rather than reinforce each other. It would be rash to assume that it will be at all easy to keep inflation over the next five years within the 2%-3% range within which it has largely moved over the past five years. What matters most, however, is that any such deviations from target are short-lived, and that inflation expectations generally are firmly anchored on the target.