The normal monetary policy reaction to a sustained period of above target inflation would be to tighten policy, to create demand conditions which are more conducive to restraining price increases and bringing inflation back to target. But so far, the Committee has not supported that course of action – and is keeping monetary policy extremely loose. Bank Rate remains at the exceptionally low level of 0.5%, the lowest official interest rate recorded since the Bank of England was established over 300 years ago. And the Committee is also currently maintaining the boost to demand from the injection of £ of new money into the economy through Quantitative Easing. 1  Data refers to Berkshire, Buckinghamshire and Oxfordshire, which is the relevant NUTS (Nomenclature of Units for Territorial Statistics) region for EU comparisons. There are 271 NUTS regions in the EU, and the latest data relates to 2007. See Eurostat (2010) for more details. 2  See Lee (2010). BIS Review 99/2010  1  Last month, however, I dissented from this approach and voted for a small rise in interest rates. And in today’s speech I want to set out the thinking behind my view of current economic prospects and the implications for UK monetary policy that led me to that decision. The monetary policy response to the global financial crisis The current stance of monetary policy in place in the UK, and in many other countries, was put in place as the response to the recession triggered by the global financial crisis.
Recovery in the world economy Over the past year or so, the world economy has bounced back strongly, led by growth in Asia but also supported by recovery in the US and a more gradual turnaround in the European economy. Consensus forecasts for 2010 growth in the three main regions of the world economy have improved significantly over the last twelve months, as Chart 1 shows. The US economy is now projected to grow by over 3% this year, and GDP in Japan is also projected to rise at a similar rate – very strong by comparison with its recent poor growth performance. True, the European economies appear to be lagging behind in this global recovery. But even is this region of the world economy, the growth outlook has improved  2  BIS Review 99/2010  compared with last summer when average growth in the European economies in 2010 was projected to be barely above zero. Chart 1: Improving growth outlook for 2010 Percentage increase in GDP projected by Consensus Forecasts 7 Asia Pacific European Union  6  US  5 4 3 2 1 0 Jun-09  Sep-09  Dec-09  Mar-10  Jun-10  Source: Consensus Economics  Last week, the IMF updated its growth forecasts and these showed a further uprating of their expectations for growth this year across the world economy, though they also highlighted some of the risks looking ahead. The latest IMF projections are now for world growth of 4.6% in 2010 and 4.3% in 2011.