During that period, inflation has ranged from a low of 2.1% to a high of 3.2%. The experience of the past decade has been that low and stable inflation has gone hand in hand with more stable growth of output and employment. Total output in the economy has now increased for 28 consecutive quarters – an unprecedented period of positive growth. And unemployment, as measured by the Labour Force Survey, has fallen from a peak of 10.7% in 1993 to its current rate of 5.9%, the lowest level for nearly twenty years. The current outlook is for continued growth with low inflation. If Britain is to retain this degree of macroeconomic stability, then there will be periods when interest rates will rise and periods when they will fall. For some commentators, interest rates can never be too low. But for too long there has been a view that interest rates should rise only when necessary, and should be lowered whenever possible. That asymmetric response was a recipe for instability. The current monetary policy regime has been designed to lock in the greater stability of both inflation and output. There are three key elements in the regime. First, there is a clear and unambiguous objective for monetary policy – an inflation target of 2½% – set by the Government.
Reports from the Bank’s regional Agents indicated that business sentiment had deteriorated sharply, and the CBI October Industrial Trends Survey showed that optimism about business conditions among manufacturers fell to its lowest level since 1980. The possibility of a recession was widely discussed. The MPC responded to the change in sentiment and to worsening conditions in the world economy. It reduced interest rates by 2½ percentage points between October 1998 and June 1999. There has been a marked turn around in sentiment during this year. Confidence measures have returned to their pre-October 1998 levels. This volatility in sentiment, is not reflected in the statistics on economic growth. The latest estimates of output for the UK show that over the past two years, output growth has been steady and close to trend with the exception of two quarters (1998 Q4 and 1999 Q1) during which a run down in stocks temporarily reduced growth. In part this stability was the result of pre-emptive monetary policy which, by reacting to the forward-looking information in surveys and other data, was able to offset the volatility in confidence feeding through to the real economy. For sometime now, the high level of sterling together with falling world commodity and food prices have restrained retail price inflation. The prices of imports into the UK fell by 15% in the past four years. It is inevitable that this favourable impact on inflation can be only temporary.