During late 2009 and through 2010, a recovery of sorts appeared to be taking hold and, by the beginning of last year, some of us were starting to think that the time to begin withdrawing some of the monetary stimulus might be starting to draw near. As the year wore on, though, it became increasingly clear that the underlying growth rate was moderating. To begin with, that reflected a continuing squeeze on household real incomes, and thus on spending, resulting from the increase in the standard rate of VAT in January and the impact of higher energy and import prices. In fact, real household income declined a total of 2½% in the two years after output troughed, whereas in normal conditions it might have been expected to rise about 5% in that time. But since last August, the deterioration also seems to have reflected heightened concerns about the prospects for the euro area. That was reflected in much tighter funding conditions for European banks, including those in the United Kingdom, and increased caution on the part of businesses both in regards to hiring and capital spending. Output is reported to have contracted by 0.2% in the final quarter, though some of the business surveys at the start of this year suggest that the economy may again be expanding. It was that deterioration in the outlook that led us to restart our asset purchases in October.
In that context, the Treasury’s announcement of a clear timetable for the clarification of its new fiscal rules, as well as its preparedness to submit its policy plans to the independent, external scrutiny of the Office for Budget Responsibility is to be welcomed. These considerations also point to the importance of distinguishing between the Bank’s financial stability operation implemented yesterday, and the Bank’s conduct of monetary policy by the MPC. I sought to emphasise that distinction earlier. So to conclude, let me sum up by describing where we stand. I speak here as an individual. I do not represent the views of the MPC as a whole. And, of course, my assessment this evening is conditional on the situation as it stands today. We live in rapidly moving times. As events unfold, assessments need to be updated. But, at present, on the basis of the fiscal easing announced last week, the macroeconomic policy environment looks set to rebalance. Taken in conjunction with the macroeconomic impact of ensuing market developments, it is hard to avoid the conclusion that the fiscal easing announced last week will prompt a significant and necessary monetary policy response in November. The views expressed in this speech are not necessarily those of the Bank of England or the Monetary Policy Committee. I would particularly like to thank Saba Alam, Bob Hills and Jack Meaning for their help in preparing this speech.