In that event, the chances of the zero low bound constraint on interest rates coming into play would increase, potentially limiting somewhat the effectiveness of any monetary policy loosening. Bank staff have conducted simulations to assess the probability of this zero lower bound constraint binding in future, based on the likely constellation of future shocks to the UK economy. Given the MPC’s existing set of tools, this puts this probability broadly in the range 15-40%. So this is a material risk, for monetary policy and for the economy, which needs to be weighed in the setting of policy. My personal view is that this provides grounds for not proceeding too hastily with any tightening of the monetary policy stance. The Role of Industrial Policy  If monetary policy can provide only short-term support for economic activity, and can do little to shape the distribution of activity across regions, sectors and individuals, what other policy options are available? 13  All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx  13  The short answer is policies which act to improve skills, investment and productivity at source. This is one of the key aims of the Government’s Industrial Strategy and underlines its importance, nationally and regionally. 21  Last week’s Autumn Statement outlined a number of measures to boost investment, skills and productivity. For example, a significant increase in spending on infrastructure was announced, through a new “National Productivity Investment Fund”.

And if one member of the monetary union improves his competitiveness through structural reforms, the others have to follow through. This process may lead to a “virtuous cycle” of reforms improving the whole competitiveness of the Euro area. The ageing of Europe’s population is another important common challenge faced by all industrialised countries but which is especially affecting our continent. In that context, it is all the more essential to address current fiscal imbalances before the budgetary impact of ageing sets in. This will need to be done through continuing efforts to reform the welfare state – notably by enhancing its efficiency and effectiveness. Reforms should not merely aim at overhauling our countries pension systems, but might also be directed towards increasing labour force participation rates. These new challenges require appropriate macroeconomic policies and further broad structural reforms, some of which have been already engaged in most countries. Confronted with major trends in demographics and global economic integration, the overriding goal of policymakers should be to strengthen the resilience of our economies to shocks. Further reforms remain to be undertaken in order to improve the smooth operation of goods and labour markets. In both cases, ill-conceived protection mechanisms have often turned into rigidities that hold back growth. Indeed, reaching a high growth potential in knowledgebased economies requires new forms of flexibility and enhanced adaptability:  2  BIS Review 115/2007  -  In goods markets, monopolistic rents, which are rarely justified, should be reduced, hence favouring R&D, free entry and exit.