While Global R* affects the level around which equilibrium real interest rates fluctuate over the  Page 4  longer term, it abstracts from the shorter-term cyclical forces at play. So let me be very clear that nothing I say today is intended to be a signal about the near term path of the equilibrium real interest rate in the United Kingdom or indeed Bank Rate over the MPC’s policy horizon. Even if the trend global real rate remains low, we may still see a rise in nominal policy rates and equilibrium real interest rates in the short to medium term. In other words, Global R* is an important underpinning, but it is not a useful guide to real-time policymaking. Since real interest rates are an important determinant of investment, in today’s speech I will also consider the extent to which investment has responded to movements in the trend real rate. As I will discuss in more detail later, the determinants of, and prospects for, investment have important implications for another equilibrium concept that helps us to understand the policy landscape: potential output, which is the hypothetical level of output that could be produced if all resources were fully employed. Global R* To illustrate the context, Chart 1 shows the UK ten-year real interest rate, measured directly from index-linked bond prices, plotted to the end of June of this year. Two things stand out immediately.
This has taken place in a global environment in which the world economies and financial systems are increasingly becoming more integrated. As a result, it can be expected that there is increased interdependence, events that take place in one part of the world will have implications on other parts of the world. This is likely to be more pronounced in the ASEAN economies and financial systems, given their openness and their high degree of integration with the global economy and international financial system. As the ASEAN and the EU continues to evolve as strategic partners, new opportunities can also be realized. An enhanced relationship will also contribute towards more effective management of the new challenges in the ever-changing global environment. Indeed, this Conference takes place at an important time when it becomes even more constructive and meaningful for our two regions to strengthen our associations, our inter-linkages and our relationships. Learning from the experiences of the EU Ladies and Gentlemen, The unification of Europe on many fronts is a major structural enhancement to the global economic and financial landscape. It is very likely however, that in view of our diversity and different structures and stages of development, the route for the integration process will be significantly different. It can be stated with certainty however, that integration will nevertheless occur. Indeed, the process has already commenced and it is likely to gain momentum as we advance forward. The motivation being the greater stability it brings and the increased growth potential it generates.