– they say – and again and again. they ’ re still twice as high as interest rates in europe – and they might just as well add, they are over 150 times as high as interest rates in japan! the many more net savers – including pensioners living off the interest on their savings – take the opposite view, although they do, of course, benefit from the low inflation environment through the protection it gives to the real value of their assets. what we have to try to do is to maintain stability in the economy as a whole, by keeping overall demand continuously broadly in line with the supply - side capacity of the economy as a whole. the inflation target is not some abstract end in itself – it is the measure, or barometer if you like, of how successfully we are managing to maintain macro - economic stability in the economy as a whole in this much wider sense. the reason that our interest rates remain higher than those in the eurozone is that, despite the recent slowdown, our economy is operating closer to capacity than theirs. that ’ s partly why our rate of unemployment is almost half theirs – though the greater structural flexibility of the british economy is even more important in this context. the mpc sets interest rates to achieve the inflation target. we have made it clear by our actions that we are just as vigorous in relaxing policy when the risks to inflation are on the downside as we are in tightening policy when the risks to inflation are on the upside. that ’ s the best help that we can give through monetary policy. it does not mean that we ignore the external pressures. in assessing the prospects for the overall economy, and for inflation, we take full account of the impact of world demand and of the exchange rate, just as we take full account of all the domestic factors bearing on inflation prospects. when, as now, the external influences are having a powerful disinflationary effect, monetary policy is of course easier, and interest rates lower, than they would otherwise be. that does not – and cannot – mean that we are able to pursue any particular objective with regard to the exchange rate – or that we respond, pavlov - like, to exchange rate fluctuations. but we can, and do, aim to offset the impact of persistent external influences on the prospect for inflation so that inflation in the economy as a whole stays on track to meet the inflation target given to us by the chancellor. that is what we have been doing – and is the

of losses for banks and a further tightening of credit conditions. the adjustment which not only the british but the world economy is experiencing is necessary as the imbalances, between spending and saving and between domestic demand and trade, unwind. as part of a longer - run rebalancing of the uk economy, an increase in our national saving rate, both private and public, is necessary. the low level of national saving is apparent from the current account deficit – our new net borrowing from overseas – which in the third quarter of last year was, relative to gdp, the biggest in the past fifty years and the largest in the g7. it is possible to run a current account deficit for a considerable period. australia, for example, has done so in every year since 1974. but our own position is becoming more difficult. for some years we have been able to finance current account deficits by borrowing, often through banks, at unusually low interest rates on world capital markets. such borrowing is now becoming more expensive. unless we spend less and save more, our current account position will deteriorate. if we are to raise our national saving rate without overall demand, output and employment suffering in the medium term, we will need to export more and import less. such a rebalancing is helped by the fall in sterling ’ s effective exchange rate. sterling has fallen, against a trade - weighted basket of currencies by almost 10 % since august. and financial markets are pricing in a significant probability of a further decline in the exchange rate during this year. a lower average level of the exchange rate can, by supporting overall economic activity, help protect us from the worst effects of the wind blowing across the atlantic. but, by pushing up import prices, it will exacerbate the impact of the other wind now buffeting the uk economy, which comes from the east – the inflationary effect of higher energy and food prices. strong growth of demand, particularly from china, india and other emerging markets in asia, has been a key driver of the sustained rises in commodity prices over recent years, most notably oil prices. inflation has picked up in the industrialised world. it is now 3. 1 % in the euro area and 4. 1 % in the united states. and although consumer price inflation here is close to target at 2. 1 %, three developments now threaten to push it significantly above target this year. first, oil prices are around $ 90 a barrel, although they