Rachel Lomax: UK monetary policy – the international context Speech by Ms Rachel Lomax, Deputy Governor of the Bank of England, at the APCIMS Annual Conference, London, 17 October 2005. *  *  *  Those of you who have logged on to the Bank of England’s website recently will have noticed that it has turned a cheerful shade of orange. It is a lovely website and we are very proud of it. But perhaps now was not the best time to major on pictures of happy shoppers clutching bulging carrier bags! The fact is that website design – like monetary policy - is beset by information problems and lengthy lags. These make it very hard to get the timing of changes just right. When the organisers of this conference pressed me for a title some weeks ago, I decided to talk about the international context for UK monetary policy for two reasons. First, I was fresh from a summer spent reading this year’s top business books, whose key theme is the dizzying pace of change in the global economy. But second, I wanted look beyond the shopping story that – understandably – tends to dominate the press, to some of the other factors that have to be weighed when the MPC sets interest rates. But let me start with the recent weakness in retail spending. Judging by the latest indicators, this looks like persisting, at least in the near term.
On the demand side, the relative importance of China and the US in powering the world economy may help to explain why world oil demand grew quite so strongly relative to world GDP last year. This year, however, the sharp rise in prices owes at least as much to supply factors. Allowing for these caveats, this is still a much stronger world economic background than, say, 2001. But there are several important risks to this outlook. The first concerns oil prices. So far the world economy has apparently taken a tripling in oil prices in its stride, thanks to the much lower oil intensity of output, and the greater flexibility in labour markets, in most advanced economies compared with a generation ago. It is also true that the short term capacity of oil producing countries to spend their increased revenues is now much greater than it was in the 70s. This helps to explain why consensus forecasts for world GDP growth next year have remained remarkably steady. But there is a very high level of uncertainty about future oil prices. Judging by the oil futures curve, the central view is that prices are likely to remain high, at around $ per barrel for the next few years at least. This is in contrast to 2000, when the oil futures curve was downward sloping. But the range of current Consensus forecasts is very wide – from around $ and $ per barrel.