- term intent. in fact, that has been our thinking for some time. through most of last year, we felt that inflation would probably tend to rise, and we would probably need to tighten further at some stage to limit the rise. but we also thought that the rise would be gradual, against a backdrop in which inflation expectations were pretty well anchored. hence, we felt that in formulating our policy response, we had time on our side, a luxury previous generations of policy - makers usually did not have. we took advantage of that to wait, evaluating further information before acting. thus far, i judge that to have been an appropriate strategy, especially given the inflation outcomes of late. nonetheless, the bank has to remain watchful in the face of a number of factors which obviously could push inflation higher. we will be ready to respond as needed so as to maintain low inflation.

crisis but nonetheless for its own reasons has been following a similar strategy. while china's investment rate is extremely high, its saving seems even higher, and it has accumulated a large stock of dollar assets. so it appears that there has been in a number of countries an excess of saving over national investment needs, which has flowed abroad looking for returns. all other things given, this puts downward pressure on the international cost of capital. in which regions of the world would such capital end up? the answer is that it would be expected to gravitate to those regions where the demand for capital is most likely to rise in response to a decline in its price. those regions have tended to be mainly ( though not exclusively ) the english - speaking countries with well - developed and innovative financial systems, optimistic populations and high levels of home ownership, the us foremost among them ( but also including the uk and australia ). the households of these countries responded to a decline in the cost of capital by using more of it. countries where populations were inherently pessimistic rather than optimistic about the future - some parts of continental europe, say, or japan - seemed less interested in using that cheaper capital. other factors have also been at work, of course. no single cause ever explains everything. but the above, i think, explains a lot of the pattern of global growth and the payment ‘ imbalances'that have characterised it in recent years. was there a more ‘ balanced'path of global expansion that could have been taken instead? it is far from clear that there was. suppose, for example, that the authorities in the us, concerned about a rising trade deficit, had slowed their economy in order to reduce imports. all other things equal, the world economy would have grown more slowly as a result. the recovery we have seen in asia from the crisis would have been slower and more difficult, and there would have been insufficient global demand to utilise the available productive resources. it is possible that the surplus countries would have reacted by expanding their domestic demand sufficiently to offset the weaker demand from the us, but in my judgement this would have been unlikely. hence, what might perhaps have the following was fairly representative of the consensus at the time : “ the united states cannot continue to have annual trade deficits of us $ 100 billion, financed by an ever - increasing inflow of foreign capital. the us trade deficit will therefore soon have to shrink … indeed, within the next decade the united states will