What I confess I did not anticipate at that time was the difficult international environment in which we've had to operate over the past four years - including both the global economic slowdown and the persistent strength of sterling against the surprisingly weak euro. It must be that external environment - which has clearly had a dampening effect on demand and output in this country - that is, for us, the frost that burns. 2  BIS Review 64/2002  There was nothing that we could do ourselves directly to address the causes of these problems which had their origins abroad. What we could do - and indeed have done - is to offset as best we could the effects of the external frost by turning up the domestic heat in our economy, cutting interest rates to their lowest level for 40 years - which is where they've been for the past 12 months - consciously encouraging consumer spending on the back of rising house prices and a rapid build up of household debt. So although we've been reasonably successful in maintaining stability in the UK economy as a whole, we've had to live with a painful imbalance within the economy - between the internationally exposed sectors, including much of manufacturing, which have been having a torrid time, and the domestically-oriented sectors which have been doing relatively well. Essentially, faced with the external frost we've turned up the domestic heat - without that we'd all have felt cold! But this approach is not without risks.
In our latest assessment this was based on the belief that inflation was somewhat higher than now proves to be the case. But monetary policy does not have such a degree of precision that it can control inflation to a tenth of a degree. And, moreover, inflation in July was high and far above the inflation target even after the downward revision of the figure. In the discussion ahead of the interest rate decision, I and other members of the Executive Board highlighted the weak labour market indicators which uniformly pointed to a weaker development of employment, which is also in line with the Riksbank's forecast. After the decision, the Labour Force Survey for August has been presented. This shows that employment increased by a moderate 0.5 per cent on a 12-month basis, which is marginally lower than the Riksbank's forecast. At our September meeting, we had access to the initial version of the National Accounts for the second quarter. These showed that GDP did not increase at all compared to the previous quarter and increased by only 0.7 per cent on a calendar-adjusted12-month basis. Now that the revised version of the National Accounts has been published, we can see that growth in the first two quarters has been marginally adjusted downwards in both cases. This means that growth in the first quarter was 2 per cent on a 12-month basis and with calendar effects taken into account. The corresponding figure for the second quarter was 0.6 per cent.