Further, the effect on forward rates is accounted for by changes in the real forward rate; there is no significant effect on forward inflation rates. At the ten-year point, the effect on the forward real rate is statistically significant with a 100bps increase in the short-rate increasing the 10-year forward rate by around 7 bps (Chart 1). To put that into context, Bank Rate has been cut by around 5pp since 2007. Taking these results at face value that kind of movement in short rates becomes enough to reduce 10-year forward rates by around 35bps. 18  BIS central bankers’ speeches  Looking across the full forward curve, there is a positive effect on very distant forward rates, with that effect significant up to around a 10-year horizon (Chart 2). Chart 1:  Chart 2:  Changes in short rates and 10-year forward real rates on MPC decision days  Changes in real forward rates on MPC decision days following a 100bps surprise change in short rates Average 95% confidence interval  Percentage points 0.30 0.25 0.20 0.15 0.10 0.05 0.00 -0.05 -0.10  5  10  15  20  It is not possible to distinguish from these exercises alone whether the identified movements in long-term real forward rates are driven by changes in long-term expectations or changes in term premia.
Slower growth of world activity is bound to prolong the restraining external effect on growth and inflation in the UK, even though the exchange rate has now started to weaken. At the same time there are also now clearer signs of overall slowdown in our own economy. The evidence for this is less obvious in the backwards-looking economic and monetary data than it is in the forward-looking surveys, but even so the data suggest that we are beginning to see an easing of pressure, including an easing of pressure in the labour market. And the surveys themselves now point to a slowdown in service sector growth, including retail distribution, as well as a sharper decline in manufacturing output. This prospect is consistent with the reports which we receive directly from the Bank’s network of regional agents and their 7000-odd industrial and commercial contacts around the country. Of course we pay very careful attention to this forward-looking evidence of developments in the economy alongside the data, and, like others, we have revised down our forecasts for output growth and inflation. And we have eased monetary policy quite sharply in the past two months, in the light of that evidence. Our current best guess - published in last week’s Inflation Report is that, after the interest rate cuts, the growth of overall output next year will be around 1%, picking up through the Millennium to around trend in the second half of the year 2000.