This means: sustained momentum relative to trend; domestic cost growth resuming a path consistent with headline inflation at 2%; and core inflation measures moving notably towards the target. It is clear to me that, since last summer, progress has been insufficient along these dimensions to warrant a tightening of monetary policy. The world is weaker and UK growth has slowed. Due to the oil price collapse, inflation has fallen further and will likely remain very low for longer. This may mean modestly weaker cost growth through this year, with the likely path for inflation, both headline and core, softer as a result. In short, recent developments suggest that the firming in inflationary pressure we had expected will take longer to materialise. 23  In economic parlance, they are elements of a reaction function. One can think of a reaction function as akin to guide or policy rule relating the policy instrument to a set of macroeconomic variables. These are usually evaluated with respect to an “objective function” containing the policymaker’s target variables. For example, a flexible inflation targeting regime would be consistent with an objective function containing the deviation of inflation from its target and the deviation of a measure or measures of real activity from their equilibrium levels, weighted according to the policymaker’s preferences for stabilising one at the cost of another.
Further downside risks to the global outlook remain, reflecting the ongoing challenges in China, fragilities in other major emerging market economies, and the potential for financial contagion. Chinese trade has been strikingly weak recently, possibly reflecting rebalancing there, as softer investment reduces demand for imported capital goods. This process has hit advanced economy exports to China, particularly those from the UK which dropped by one third in the year to November. Global difficulties are likely to continue to suppress world demand relative to our expectations in August. In addition, possible spillovers to domestic demand via wealth and cost of capital channels bear close monitoring. BIS central bankers’ speeches  9  As one consideration in setting monetary policy, the MPC must evaluate how much of the moderation in output growth reflects slower supply growth. Slack ultimately matters for inflationary pressures, though sizing it requires careful judgement, particularly after a supply shock.12 A simple read can be taken from the unemployment rate, which has continued its solid downward trend since the autumn of 2013, falling more rapidly than we had expected in August and its historical relationship with GDP growth would have suggested (Chart 8). Short-term unemployment is now below its pre-crisis average rate, though longer-term unemployment has further to go (Chart 9).13 In addition, the vacancy to unemployment ratio – a simple measure of labour market tightness – is at its highest observed level since August 2005.