Output is still some 4% below its previous peak and more than 10% below where it would have been if the economy had simply continued growing at its pre-crisis historical trend. There have been few winners over the past few years. In a deep sense, the low level of real interest rates here and in the other advanced economies is a reflection of the impact on the financial crisis. Heightened uncertainty and, for some households, a desire to reduce their indebtedness have resulted in an increased propensity to save. And the same heightened uncertainty has reduced the appetite of businesses to invest and encouraged them to build up cash buffers. Substantial dissaving by the public sector could offset that initially, but there are limits to how long the markets will allow high deficits to be sustained. Fiscal consolidation was unavoidable at some juncture. Given that, the stance of monetary policy needs to be loose in order to sustain demand. If we had chosen to run a substantially tighter monetary policy, then that would only have served to depress activity and raise unemployment even further. By slowing growth, it would also make the task of fiscal consolidation and de-leveraging even more challenging. And by providing a gloomier climate for business, it would also inhibit investment and slow the necessary re-balancing of our economy towards manufacturing and internationally tradable services. Treating serious medical conditions often has unwanted side effects. But, unpleasant as those side effects sometimes are, treatment is invariably better than the alternative.
Indeed, in the absence of the extra £ billion of gilt purchases announced two weeks ago, we judged that inflation would be rather more likely than not to undershoot our 2% target in the medium term. That was why we decided that it was necessary to do more. Moreover, the longer capacity lies idle, the more likely it is to be scrapped completely. And the longer people are out of work, the more likely they are to become disconnected from the labour market altogether. So there is an added incentive to getting the recovery back on track quickly. The euro area represents the biggest single downside risk to this picture. Greece is the country in the headlines right now, but several countries of the euro-area periphery face, in varying degrees, a challenging mixture of unsustainably high public and/or private indebtedness and weak competitiveness. Correcting those problems requires: fiscal consolidation; bank recapitalisation; and a rebalancing of demand towards net exports. The first two are under way, but the third is harder to achieve in a monetary union where no exchange rate movement is possible to bring about the necessary improvement in international competitiveness. At best, these countries face an extended period of very low growth while the necessary adjustments take place. And while this morning’s agreement between the Greek government and the euro-area authorities is certainly welcome, there still remains a possibility that events could unfold in a disorderly and damaging fashion at some stage in the future.