Monetary policy can reduce inflation, but only at the cost of reducing output and increasing unemployment. If inflation is above target and output is below potential (or vice versa), there is a fundamental trade-off between achieving the two objectives. Since 2013 the MPC’s remit has required us to manage significant trade-offs when exceptional circumstances cause them to arise. And that has been the basis for the Committee’s assessment of the UK situation since the referendum. 12  To explain how our position on this has evolved, let me turn to the second unusual aspect of the economy that I want to focus on this afternoon: the UK labour market. 11  For more details see Box 5, “How has the economy evolved relative to the February 2017 Report”, in the Prospects for Inflation section of the May 2018 Inflation Report. 12 For a detailed explanation see: Carney, M (2017), “Lambda”, speech at the London School of Economics, 16 January 2017. 9  All speeches are available online at www.bankofengland.co.uk/speeches  9  The labour market I said at the start of this speech that wage growth has been surprisingly weak. That wasn’t a figure of speech. This chart (Chart 8) shows the MPC’s wage growth forecasts from the past few years against the actual data. As you can see, the MPC have been consistently surprised by the continued weakness of wage growth.
If you have debt approaching 100% of GDP, you have to reduce it to be less vulnerable. Are you worried by the political uncertainty? Political uncertainty is an important factor because we always need stable governments capable of taking action. And this is of course quite obvious: we don’t have the political stability necessary to put into place the necessary measures and policies, including a budget. What do they think here in Frankfurt about the fact that the budget has been deferred since the time when you were still a minister? Spain has continued to reduce its public debt. It could have been reduced more, but it could also have been reduced less. In any case there is one fundamental factor: the growth differential. In the Spanish economy, this now comes from a financial sector that doesn’t have the same doubts hanging over it as it did five to seven years ago. And it is competitive. The most important thing, in contrast to the previous and other growth cycles, is that it is growing without an increase in loans and without a real estate bubble. With lending growth that is below nominal GDP and a current account surplus in the balance of payments. As long as these two things continue, the Spanish economy will keep growing faster than the rest. The recommendation, which is also valid for Portugal, Greece and Ireland, and even for Italy, is this: stabilise the banking sector and the credit markets. And maintain competitiveness. Then you will do better than average.