Much hinges on the speed with which domestic confidence returns. As is entirely appropriate, there is a debate at the MPC over the relative merits of near term stimulus to reinforce the expected recovery in UK growth and inflation. 19  All speeches are available online at www.bankofengland.co.uk/news/speeches  19  On the one hand, there is a modest but rising degree of spare capacity in the UK and core inflation remains subdued. There are downside risks from global growth and the possibility that uncertainties over future trading relationships could remain entrenched. With the relatively limited space to cut Bank Rate, if evidence builds that the weakness in activity could persist, risk management considerations would favour a relatively prompt response. On the other hand, global growth is showing tentative signs of stabilising. The global manufacturing PMI has returned to expansionary territory, helping push the composite to a six month high in December. Past global monetary policy stimulus is gaining traction and global financial conditions are supportive. Early indicators, from financial market prices and the limited number of business surveys since the election, suggest that there has been some reduction in Brexit-related and domestic policy uncertainties. The labour market remains tight and domestically generated inflation remains generally firm. And total monetary policy space is larger than conventional measures would suggest. In the coming weeks, the MPC will watch closely surveys of business and consumer confidence (including intelligence from our Agents) as well as global developments. We will also undertake our annual supply stocktake.
One reason why equilibrium interest rates are low at the moment is because the distribution of economic outcomes has become more skewed to the downside. In this regard, low rates are a consequence of riskier environment, not the cause of higher risk premia. 26 For example, see Ihrig, J, Klee, E, Li, C, Wei, M, and Kachovec, J (2018), ‘Expectations about the Federal Reserve’s balance sheet and the term structure of interest rates’, International Journal of Central Banking, vol. 14(2), pp. 341-390. 21  All speeches are available online at www.bankofengland.co.uk/news/speeches  21  V. Winter – Monetary policy in a persistently low r* world Looking ahead, deep structural changes in economies are creating disinflationary pressures at a time when conventional monetary policy space is already limited. Inflation targeting frameworks will be tested in new ways. It feels like winter is coming. In all likelihood, equilibrium interest rates will remain low for a prolonged period as many of the structural forces that have pushed them down are set to persist for years. Moreover, these could likely to be reinforced by flaws inherent in the international monetary and financial system27 and the disinflationary effects of advances in technology and the changing nature of commerce.28 The principle structural force leaning in the other direction on inflation is that the shift towards deglobalisation with the potential fracturing of the global trading system.