To what extent does this sketch resemble the current situation in the UK? As its policy stance reflects, the Monetary Policy Committee (MPC) judges that the equilibrium real interest rate has been, and continues to be, negative. Despite very low interest rates, resources are not fully employed. 850,000 more people are out of work than in the years before the crisis and GDP is around 20% below an extrapolation of its pre-crisis trend. As bad as these figures are, the scale of the mismatch between aggregate supply and demand has not been large enough to generate a deflationary spiral. Despite persistently weak nominal wage growth, rising import prices and weak productivity growth have meant that the UK’s problem has been the need to bring inflation back to the target from above. In this regard, there has been welcome progress. Headline inflation has fallen back much sooner than we expected at the start of the year, and core inflation measures are running close to but slightly below the 2% target. What then of the risks of unbalanced growth? This is more delicate. Despite admirable progress by British households in recent years, aggregate debt levels remain high at 140% of incomes. In addition, housing activity is picking up and price growth appears to be gaining momentum. Moreover, the UK current account deficit is near record levels. These developments merit vigilance but not panic. The housing recovery could reflect higher future income expectations, prompted by the nascent recovery, and better credit conditions.

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