So when nominal interest rates change, the real interest rates that determine real consumption and investment decisions change with them. And markets may operate with ‘excess supply’ or ‘excess demand’ for as long as it takes wages and prices to adjust to shifts in either demand or supply. Rather, it is over longer stretches of time that monetary policy is indeed ‘neutral’, and that we can think of the level of economic activity as being driven entirely by supply. By facilitating low and stable inflation, monetary policy helps create conditions conducive to economic growth. But other forces will ultimately determine the growth path of the economy. Economic growth – and with it the prospects for our real national income – will be determined by technological progress, investment and innovation, and by skills and trends in the population. Equally, both the structure of the economy and the distribution of real national income are beyond the realm of monetary policy. Yes, monetary policy affects asset prices and unemployment over the near term. And yes, excess demand or supply may give rise to sectoral imbalances. But over the longer term, these features of our national economy will be driven by real factors and by structural policies rather than monetary policy. Over time, even the level of interest rates is determined by such structural factors. While monetary policy steers market interest rates here and now, we do not set Bank Rate in a vacuum.
Chart 5: Population ageing is expected to continue Age distribution in the adult (16+) UK population (a)  (a) Dashed line and hashed bars are calculated using the ONS 2020-based interim national population projections: year ending June 2022 estimated international migration variant. Sources: ONS and Bank calculations. Chart 5 shows the age distribution for the United Kingdom. The share of the adult population aged 20-59 has fallen below 65% in the past decade, and it is set to decline further in the coming years. This population ageing has been driven by a decline in birth rates relative to the high levels seen in the years that followed the Second World War – as well as by the happier news that people now live for longer. As people accumulate savings over their working life to fund their retirement, wealth in the economy increases as the age distribution shifts towards older cohorts (indicated in this chart by bars in different colours). So ageing households have sought to lend more at a time when less productive firms have sought to borrow less. The only way to establish an equilibrium between the supply and demand in the market for investable funds – that is, to incentivise firms to invest this  Bank of England  Page 9  additional wealth into productive capital – has been for the price of those funds, the real interest rate, to fall. The trend equilibrium rate, R*, is like a long-term anchor for monetary policy.