15  All speeches are available online at www.bankofengland.co.uk/speeches  15  Chart 10: With no monetary policy tightening, excess demand builds significantly and inflation remains above target May 2018 Inflation Report projections for inflation and growth Per cent / Per cent of potential GDP 4.0 3.5 Inflation projection market conditioning path  Inflation projection constant rate path  3.0 2.5 2.0  2% inflation target  Excess supply / demand projection - constant rate path  1.5 1.0 0.5 0.0  Excess supply / demand projection - market conditioning path 2012  2013  2014  2015  2016  2017  -0.5 -1.0 2018  2019  2020  2021  Of course, as the Committee has made clear before, its guidance about the likely gentle path of rate increases depends on the economy evolving broadly as expected – in particular, whether growth in demand exceeds that of supply. That might not happen. For example, the weakness in demand at the start of the year could reflect a worsening of the underlying economic climate, not the temporary effects of adverse weather as the Committee currently assesses. In particular, there is somewhat greater uncertainty about the near-term momentum in consumer spending at present, given recent weakness in consumer credit and the housing market across a range of indicators. Growth in consumer credit, particularly credit cards, slowed sharply in March. Retail sales volumes have been falling and profit warnings in the retail sector rising.

To resolve this, fair-burden sharing will be necessary among leading economies and different regions. Structural Reforms Economic recovery will continue to be restrained unless countries speed up structural reforms. An effective way to improve long-term economic prospects is to address structural rigidities that weigh down the efficiency of labor markets. It must be recognized that demographic challenges such as the aging of the population add pressure on the labor market and public finances. Increased labor market participation and restructuring of benefit schemes are therefore needed. Authorities and labor market participants have to work together in this effort. Other structural rigidities in financial and product markets are of no less importance, and removing such obstacles is conducive to growth. Many economies are burdened with government deficits in the midst of the global economic slowdown. Automatic stabilizers have been allowed to operate in order to support growth. This may be prudent and appropriate; however, care should be taken that public finances do not become unsustainable. Policy makers are responsible for planning both for the short and the longer term and we encourage governments to consolidate their fiscal positions in order to enhance their nations’ competitiveness. The Fund should continue to monitor closely structural deficiencies and advise accordingly. Good Governance Economic integration has brought increased prosperity to those who have been part of the globalization process. Increased globalization also implies intensified competition in most areas. Good governance is, therefore, more important now than ever because it fosters confidence and growth, without entailing much additional economic cost.