We can’t be sure since no two historical episodes are ever exactly the same. Until underlying growth resumes, we can’t be certain that it will, of its own accord. At the very least, that makes me pause to consider when policy should start to be normalised or even whether further loosening might be justified. The recovery in 2010 was driven by a particularly strong contribution from business investment and stock-building (Chart 4). The latter was always likely to offer a transitory boost to overall growth as companies returned stock holdings towards their desired levels, after de-stocking during the recession. And investment was always likely to make some positive contribution – at least once delayed projects and routine maintenance were re-started. But that boost is unlikely to persist without a pick-up in final demand to justify it. And consumer spending, the most important component of UK demand, has been stagnant for a year (Chart 5). The current behaviour of consumption is markedly different to that during the 1980s and 1990s when consumption had broadly regained its pre-recession level by this point in the cycle, rather than being around 4% below it (Chart 6). BIS central bankers’ speeches  3  Chart 4  Chart 5  Contributions to 4-quarter GDP growth(a)  Household consumption(a)  Percentage points 6 4 2 0 -2  Consumption Government spending Investment Stockbuilding Net trade GDP (per cent)  -4 -6 -8  2000  2002  2004  2006  2008  (a) Investment includes valuables. excluding the alignment adjustment.
I see little evidence that inflation expectations might generate the start of a wage-price spiral for example. There are, however, immediate downside risks to the growth outlook. Although my central expectation is that the recent weakness will just be a soft patch, I do worry about a more  8  BIS central bankers’ speeches  prolonged weakness in demand, and in particular, consumer spending. That could knock the recovery off course for a sustained period, shifting the balance of risks around medium-term inflation to the downside. With that risk in mind, putting up Bank Rate could be exactly the wrong thing to do at this precise moment. If it further damaged consumer confidence then it could be the marginal factor that makes a soft patch turn into something worse. Of course, at some point, Bank Rate will have to rise: interest rates will need to normalise if, once the spare capacity in the economy has been eliminated, monetary policy is to be consistent with the 2% target. And because of the lengthy lags involved, Bank Rate will need to start the long journey back to more normal settings well before the degree of spare capacity is eliminated. But for now, I believe there remains time to allow the economy to recover before the eventual tightening begins. I am not trying to give any hints today as to exactly when that will be. I honestly don’t know. I can only continue to assess the data and the outlook as it changes, month by month.