Unemployment continued to fall and the amount of excess supply was gradually, but meaningfully, reduced. These factors looked set to provide the momentum needed to bring domestic inflationary pressures back to up to a rate consistent with the inflation target. It was notable that wage growth was already showing signs of picking up. At this time, however, total CPI inflation had fallen to around zero. While below-target inflation partly reflected the drag from past spare capacity, the majority was due to falls in energy prices, muted growth in world prices and a recent appreciation of sterling.13 Measures of core inflation that attempt to strip out these external factors had fallen much less sharply, though were still below target-consistent rates. The MPC expected the effects of the external factors on inflation to be protracted, particularly the dampening influence of sterling, which was likely to still be affecting inflation in two years' time or what is viewed as the conventional policy horizon. The Committee had learnt from the experience of the post-crisis depreciation in sterling that the pass-through of changes in the exchange rate through supply chains into UK CPI inflation is slow, not swift, taking several years to complete. The Committee therefore continued to maintain Bank Rate at 0.5%, judging this was appropriate to ensure that waning drag on inflation from external price pressures would be balanced by further increases in domestic inflationary pressures brought about by eliminating the remaining margin of spare capacity in the economy.
In particular, we needed to bear in mind that the euro area’s financial system is predominantly bank-based. Take the structures of private credit outstanding as an example: recourse to banks makes up more than 70% of non-equity external finance in the euro area. By comparison, in the US the equivalent proportion is only around 30%. This reflects the fact that the US financial system is primarily market-based. In the euro area, guaranteeing steady access to credit for households and companies largely means preserving the viability of the banking system. Banks play such a dominant role in our economy that it was appropriate to focus our non-standard measures on the banking sector. This profound contrast in financial and economic structures explains the different responses by central banks to the crisis as exemplified by the approaches of the ECB and the Federal Reserve System of the US. We rely on different channels as regards the transmission of our policy action. But these variations do not reflect conflicting views on fundamental principles or objectives. On the contrary: given the different structures, the approaches need to be different to achieve the same objective. Thus, I would strongly argue that central banks around the world are united in purpose. As I indicated before, the remarks I just made on the ECB’s response to the crisis did not contain any message concerning future monetary policy, and should not be interpreted as containing any such message.