This is not a hypothetical story; it is the UK story. If levels of productivity among companies hold the key to explaining regional variations in incomes, this naturally begs the question why does productivity differ by region. Past empirical studies have highlighted a range of factors - economic, geographic, technological, social – in explaining productivity. 11  From that  potentially long list, let me highlight two factors: physical capital and human capital. One important determinant of a firm’s efficiency is the amount it invests in machines and technology - its physical capital stock. Measuring the capital stock is difficult even at an aggregate level and there are no reliable data on regional capital stocks. There are data, however, on regional patterns of business investment and research and development spending – the flow rather than stock of physical capital. Chart 6 shows regional spending on R&D per head of the working age population. This shows a wide regional divergence, with the most R&D-intensive region (the East of England) having levels of investment four times those in the least R&D-intensive region (the North East). This map has a close correspondence with regional measures of productivity, consistent with capital-intensive regions having higher levels of productivity. 12  A second determinant of firm-level productivity is the skill level of workers, so-called human capital. 10 11 12  See ONS ‘Sub-regional labour productivity’, available here. See Barnet et al (2014), IMF (2015), Haldane (2015), OECD (2015).

The projections for inflation were the highest ever published by the Bank, while the forecasts for output growth were the lowest ever published. In other words, these projections highlighted the difficult trade-off facing the MPC in keeping inflation close to target, while supporting output and jobs growth in the economy. In the MPC’s judgement in November, managing this trade-off was best achieved by maintaining the current monetary policy stance, with a neutral bias on the direction of the next move in interest rates. Consistent with this neutral bias, the MPC judged the risks to inflation and output to be broadly symmetric and, given heightened uncertainty since the referendum, larger than usual. My own personal judgement on the appropriate monetary policy stance is close to the MPC consensus. In August, I believed the risks to inflation and output lay to the downside, even after the stimulus measures. 20  See http://www.bankofengland.co.uk/research/Pages/onebank/decisionmakerpanel.aspx. 12  All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx  12  That is why I supported forward guidance on a further lowering of interest rates in the run-up to the end of the year, provided the economy evolved in line with the MPC’s projections for inflation and output at the time. In the event, output has out-performed those expectations, while expectations of inflation have picked up, largely as a result of sterling’s depreciation. That configuration now leaves me comfortable with the current stance of monetary policy, with no bias on the direction of the next move in interest rates.