A sharp pick-up in the rate of growth of the money supply in 1995 provided an early indication that demand growth was likely to accelerate. And money supply growth has remained strong throughout the whole of the past year. Faster growth of consumer spending became evident in the first half of 1996 and has been sustained. And from the middle of last year this began to feed through into output - which was initially held back, and is possibly still being affected by a run-down of stocks. Now the fact is that no-one can tell you with any great confidence just when the increase in demand is likely to begin to create economic imbalance and spill over into rising inflation. But we can be reasonably certain that money supply growth at around 9-10% a year, as we have seen it now since the beginning of last year, and growth in consumer spending at nearly 4% a year, as we have seen over the last year, cannot be sustained for long consistently with the Government’s inflation target in the medium term. And there are signs in the recently more rapid tightening of the labour market and in the gathering recovery in the housing market, for example, that demand may be strengthening. BIS Review 5/1997  -2-  That, essentially, is why the Bank has been arguing that we will need at some early stage a modest pre-emptive tightening of monetary policy.
When we confronted a similar dilemma in the 1980s, the domestic expansion was allowed for some time to continue unchecked, but in the end we were driven to bring it to a jarring halt. I do not suggest for a moment that we are anywhere close to that situation now. Our aim is precisely to avoid that. But that experience does illustrate that, in the final analysis, there could be real dangers in allowing justified concern about the exchange rate to deflect us for too long from moving gradually to moderate the upswing. I emphasise the words “gradually” and “moderate”. The choice ultimately in this situation is not whether or not; it is sooner or later, less or more. BIS Review 5/1997  -3-  Our present dilemma - and it is a real dilemma - serves to illuminate the debate about the economics pros and cons of European Monetary Union, and the difficult decisions that will face all EU countries in little over a year from now. On the one hand, the real attractions - to manufacturers in particular - of exchange rate fixity within the euro area, are amply apparent. On the other hand, our dilemma - and we are not alone in this dilemma within Europe - points up the problem that would arise if the single European monetary policy - the single interest rates - does not meet the domestic monetary policy needs of all the euro-member countries.