3  For example, estimates from term structure models such as those discussed in Meldrum, A and Roberts-Sklar, M (2014), ‘Long-run  priors for term structure models’, Bank of England Working Paper 575. 3  All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx  3  The lower demand for investment accounts for nearly two-fifths of the reduction. An ongoing decline in the price of investment goods, less public investment and systematically higher credit spreads account for the reduction in desired investment. And, alongside these changes in the levels of the supply of saving and the demand for investment, there has also been a change in the underlying return on investment. Expectations of a lower rate of real global growth accounted for another fifth of the reduction in the trend real rate of interest. 4  Three caveats are important at this point. The first is that the Bank work estimated the reduction in the global average trend real rate and the impact of changes in the level of global savings and investment. To the extent that global capital markets are not perfectly integrated and that there is an element of home bias in the financial allocation of savings, changes in the national supply of savings and demand for investment matter too. For example, developments in UK demographics would suggest less of a reduction in the trend real rate here than seen globally. But overall, the evidence suggests a very significant proportion of the movement in UK trend rates reflects developments elsewhere.
The impact of the depreciation of sterling on future inflation has increased the salience of such a trade-off for the MPC. As the Committee has made clear, there are limits to the extent to which above-target inflation can be tolerated. These limits depend inter alia on what is driving the inflation overshoot, on the impact on inflation expectations and on the scale of the output gap. The exchange rate shock has made it more difficult for policy to follow the natural rate. And finally, I have discussed the implications of a low natural rate and low real trend rate for central banks. But the implications of course go much wider than that. A secular period of very low underlying interest rates would pose many challenges. If, as I have suggested, the forces pushing down on interest rates might be less cyclical than we had thought and more secular, authorities with a longer policy horizon and with instruments more enduring in impact than monetary policy are best placed to address such challenges. A key and well recognised challenge in this respect is to raise the growth rate of productivity in advanced economies which will in turn raise the return on investment and hence the trend real rate of interest. Another might be to address the imbalance in the supply of savings and the demand for investment that appears to have pushed the trend real rate down.