Mr King speaks about interest rates, policy and the UK economy  Speech given by Mr Mervyn King, Deputy Governor of the Bank of England, to the Scottish Council Development and Industry, held in Edinburgh on 11 October 1999. * 1. *  *  Introduction  Twelve months or so ago, interest rates were 7½%; now they are 5¼%. Twelve weeks ago they were only 5%. So why do interest rates sometimes go down and sometimes go up? And why, in particular, did interest rates rise in September? At one level, the answer to these questions is straightforward: interest rates move – whether up or down – in order to keep inflation on track to hit the target of 2½%. But, at a deeper level, why should monetary policy aim at a target for inflation rather than at growth and employment? Most people in this audience today belong to the “inflation generation”. You will have lived through a time in which inflation was a fact of life. For much of UK history prices were relatively stable. But during the 1960s inflation started to rise. In the 1970s inflation averaged no less than 13% a year with a peak of over 27% in August 1975. During the following decade inflation averaged 7% a year, and it has fallen to around 4% in the 1990s. Between June 1997 – when the Monetary Policy Committee met for the first time – and August 1999 RPIX inflation averaged 2.6%.
To do this the MPC has to assess the prospective balance between demand and supply in the economy as a whole. That requires an analysis of both demand and supply developments. The interesting feature of recent quarters has been the combination of strong demand growth and a tight labour market, on the one hand, with weak wage and price pressures, on the other. So the MPC monitors monetary data as well as signs of tightness in both labour and product markets in order to detect early warning signs of inflationary pressures. The MPC needs as much timely and accurate information as possible. Official statistics and surveys provide an excellent starting point. But they often need to be complemented by more timely and focussed information on particular aspects of the economy. So the Bank has a network of twelve Agencies, which gather economic intelligence from all parts of the United Kingdom – from Cornwall to the Highlands, and from County Tyrone to the Norfolk Broads. The task of these Agencies is to provide information on the state of the local economy. In total, the Agents have around 7,000 business contacts covering all sectors of the economy from farming to finance and textiles to tourism. Our Scottish Agent, Janet Bulloch, who is with us tonight, is well known to many of you. I would like to thank those of you who give your valuable time to see Janet and her team.