directly influence the supply side, which depends upon a whole host of structural characteristics which are largely beyond the direct reach of monetary policy. what we have to do in managing short - term interest rates is to keep overall demand growing broadly in line with the underlying - sustainable - supply - side capacity of the economy as a whole to meet that demand. in other words we are trying to maintain overall, macroeconomic, stability in a much broader sense, in the medium - and longer - term and not just the shortterm ; and the government's inflation target is the criterion against which our success, or otherwise, in achieving that broader macro - economic stability is to be measured. our problem is that we don't know with any great precision or confidence exactly what is happening on the supply - side : - we don't know that's to say precisely what rate of growth we can hope to sustain. we don't know precisely either what is currently happening, or what is likely to happen looking forward over the next couple of years or so, to overall, aggregate, demand. and nor do we know precisely what the full impact of a change in interest rates will be on aggregate demand, or how long it will take before the full impact is felt. ours is not a precise science. in fact it's more of an art than a science. and, although we bring as much economic and statistical science to bear as we can, we know that our forecasts, and indeed our policy judgements, are subject to a range of error. they can't be accurate to every last digit. so, we can't expect to hit the inflation target all the time, but by consistently aiming to do so we can hope to get reasonably close to the target on average over time. the uncertainties are well illustrated by the sudden jump in the rpix inflation rate in january to 2. 6 % announced a month ago, only to fall back to 2. 2 % in february - published this morning. and, given these uncertainties, the overall results over the past decade since the recession of the early 1990's have been encouraging. whether that's a result of good luck or good judgement i leave to others to decide - i'm more interested in the outcome. since the summer of 1992, inflation, on the target measure has averaged just 2. 6 % - and has been more stable than at any time in our history. and it has been consistently remarkably

we took the view that unbalanced growth was better than no growth. the question now, of course, is where do we go from here. there have recently been encouraging, but still tentative, signs that the worst of the global slowdown may now be behind us, and that the us and eurozone economies are now beginning to bottom out and will pick up, perhaps to around trend, as we go through this year. some asian countries actively involved in the ict sector are showing a strong recovery, and even in japan financial markets have recently strengthened. as for the exchange rate, the euro, which has, as i say, been puzzlingly weak since soon after its introduction 3 years ago, still seems likely to strengthen eventually. as it becomes clearer that the international environment really is improving, and that external demand really is picking up, then we can look forward to better balanced and generally stronger growth in our own economy. that will in due course mean that domestic demand growth - and consumer demand growth in particular - will need to moderate if we are to avoid a build up of inflationary pressure. but let me be quite clear - that's not a warning, still less is it a threat. it is essentially just a matter of arithmetic! it's quite possible, even quite likely, that the necessary moderation of consumer demand - and i emphasise the word moderation - will come about of its own accord, given the gradual increase in unemployment we are currently seeing, and the build up of household debt. and provided it does not happen too abruptly, that would be the best possible outcome. but if consumer spending were not to moderate of its own accord, we would, in the context of strengthening external demand, clearly need at some point to consider raising interest rates to bring that moderation about. i don't suggest that the timing of any such move is imminent - that will obviously depend upon the timing and the strength of the recovery abroad and on the strength of domestic demand as we move forward. and that, subhash, is of course my answer to your second question - " what precisely will happen to interest rates? " in case any of you are confused, i think that what i said was that interest rates will rise - unless they fall or stay the same! mr president, there is no doubt that the past year or so has been a difficult time for the world economy which made life increasingly difficult for the internationally - exposed sectors of our own economy. we