Household and business confidence continued to strengthen, reinforcing the economic momentum. In the event, the unemployment rate fell far faster than we had expected, falling below 7% in February 2014. But even as the recovery strengthened and survey indicators of output growth reached levels previously associated with sharp policy tightenings (Chart 1), market expectations about the future path of policy remained subdued (Chart 2). Participants understood the conditionality of guidance, as they and the MPC learned that there was still considerable spare capacity in the economy. Chart 2: Forward market interest rates rose only modestly as unemployment fell quickly towards 7% August 2013 guidance issued  Data published showing Percent unemployment fell to 6.9% 4.0  February 2014 guidance issued  3.5 3.0  Counterfactual path for Bank Rate based on historic correlation with survey indicators of output growth  2.5 2.0 1.5  UK 1 year instantenous forward OIS rates  1.0 0.5 0.0  Jan. 12  Jul. 12  Jan. 13  Jul. 13  Jan. 14  Jul. 14  Sources: Bloomberg Finance L.P., IHS Markit, ONS and Bank calculations. The MPC’s second use of guidance responded to another structural development: the sharp fall in the equilibrium real interest rate, or r*. 6  In February 2014, the Committee explained why it expected the equilibrium rate of interest to be much lower than in the past, and then outlined the possible consequences for policy. 7  The Committee signalled that the policy path was likely to be different from the past.
Of course, the execution of our exit strategy will still present us with a tricky judgement call. We do not want to nip a recovery in the bud prematurely. Equally we will not want to let the inflation genie out of the bottle. But that is the sort of balancing act that monetary policy makers regularly face, even if the scale of the downturn and the size of the policy stimulus that has to be withdrawn are so much larger now. A previous guest at this Feast, Winston Churchill, declared that he “would rather see finance less proud and industry more content”, shortly before he took the fateful decision to return  BIS Review 62/2009  3  the pound to the gold standard at an overvalued rate. Finance has certainly been humbled by the events of the past couple of years and the post-crisis financial world is bound to look very different from the pre-crisis one. But let us also hope that it is a world in which industry is more content. It remains only for me to thank you again for a marvellous meal and to propose a toast. To the Manufacturing Industries of Hallamshire. 4  BIS Review 62/2009