of expansion has picked up, to close to 4 %, under the impact particularly of strong domestic demand, and that is well above any realistic estimate of the sustainable rate - the underlying rate of growth of supply - side capacity. and this is showing up in the labour market in evidence of skills shortages and in some signs of higher pay settlements and earnings. if we are not now to run into a period of excess demand and accelerating inflation, the rate of growth of the overall economy needs to moderate - quite soon and quite sharply. and it almost certainly will moderate during the course of this year, and may indeed have begun to do so. the growth of domestic demand is likely to be held back by the relatively tight fiscal policy as well as by the monetary policy tightening since may ; and the effect this year of “ windfalls ” as a result of building societies ’ demutualisations will be very much smaller. and we expect a deterioration in our net external trade position as a result of the strength of sterling ’ s exchange rate and now, too, as a result of the recent developments in asia. the difficult questions for policy relate to the timing and the extent of the slowdown that is necessary on the one hand and likely on the other. these are difficult judgements at any time. they are particularly difficult when the economy is already close to full capacity. it is not surprising that commentators differ in degree in their assessments. economics is not - as i say - a precise science. neither we at the bank nor anyone else know with any great precision exactly where we are in relation to full capacity or exactly how fast capacity is growing ; and we don ’ t know precisely either how demand will in fact respond to the policy tightening that is already in place. our own best - and very carefully informed - guess is embodied in the forecasts that we publish each quarter, and we monitor immensely carefully the new information that becomes available day by day in the light of that forecast for early warning signs of emerging imbalance. the second major difficulty in our present situation relates to the strength of the exchange rate. we are, of course, acutely aware of the problems that this is creating - and has been creating for the past year or so - for those sectors of the economy that are engaged in international trade and exposed to international competition. given that the uk chemical industry exports nearly two - thirds of its output, and that this country imports nearly 60 % of the chemicals we consume, it is just possible that

attractive - given of course a reasonable starting point. the potential downside, from a macro - economic standpoint, is that just as now directing monetary policy to lowering the exchange rate would mean losing control over domestic demand, so too, as a member of the euro area we might find that the single euro interest rate was not necessarily appropriate to our domestic situation. we would certainly be facing a build - up of excess demand, and inflationary pressure, now, for example, if we were constrained to german - level interest rates. at other times interest rates that were appropriate in europe as a whole could impose unnecessary stagnation and rising unemployment in this country. serious divergence of this kind between the domestic monetary policy needs within the euro - area is not, of course, inevitable. but, if it is to be avoided it is important that the economies of the euro - member countries should have shown at least a minimum degree of sustainable convergence - before the project goes ahead. that was recognised very clearly in the famous convergence criteria written into the maastricht treaty. assessing the extent to which sustainable convergence has in fact been achieved is the unenviable task facing the european finance ministers and heads of government at their historic meeting at the beginning of may. whatever they decide more widely, it is clear in my view that, for a number of reasons, including the cyclical differences between our situation and that on the continent, we cannot now be confident that this country could live reasonably comfortably with a single european interest rate. that is why i welcomed the government ’ s decision last october to exercise, for the time being, our opt - out, but to plan the technical preparation for our future participation, when we are more confident that sustainable convergence has indeed been achieved.