And the MPC has asked the Bank’s regional Agents to conduct a survey of borrowing conditions faced by businesses around the country in time for the MPC meeting in November. The international situation is, of course, only one of the factors that influence interest rates. In the August Inflation Report, the MPC made clear that it expected - indeed wanted - the growth of domestic demand to continue to slow throughout this year and into next. A slowdown is necessary because, as the restraining effects on retail prices from the rise in sterling start to wear off, domestically generated inflation must fall if the inflation target is to be met. The latest data from the Office for National Statistics show that domestic demand and output have been growing broadly in line with the desired path. But survey data show a markedly weaker picture for output and orders, both over recent months and, more importantly, looking ahead. The lags with which changes in monetary policy affect the economy mean that the MPC can not wait to find out whether the surveys provide an accurate prediction before it sets policy. Each month the MPC balances the information contained in official statistics, surveys, anecdote and the impressions of conditions in industry relayed to us by our network of regional agents. An issue of considerable importance is the state of the labour market. The August Inflation Report argued that the outlook for inflation depended critically upon the labour market and, in particular, on the behaviour of earnings.
That will have consequences for trade balances and activity in both emerging markets and industrialised countries. Second, falls in equity prices around the world have reduced household wealth. And third, the sudden increase in risk aversion in financial markets is changing the balance sheets of financial institutions and some fear that this may lead to a credit crunch. The reduction in capital flows to emerging markets started over a year ago when concerns about the foreign currency exposures of a number of countries led to withdrawals of funds and a liquidity crisis in Asia. That liquidity problem was compounded by macroeconomic and structural problems which varied from country to country. But the net effect was that capital flows to emerging markets in Asia fell from over $ bn in 1996 to only about $ bn in 1997. That retrenchment has continued during 1998. Why does this matter? In the absence of other sources of finance, a reduction in net capital inflows has to be matched by a corresponding improvement in the current accounts of the emerging market economies. To achieve such a rapid turn-round in the current account required significant depreciations of their currencies and deep recessions. The counterpart to the improvement in the current account of the countries affected is a larger trade deficit, or smaller trade surplus, in the rest of the world.