future, so it is not surprising that there should be differences of view. and the opportunity to explore and explain these differences in a rational and open way is an important part of getting to a better answer. the outlook for the economy let me turn now to an assessment of the economy. the recent debate has, of course, been dominated by discussion of the implications of the terrorist attack on the united states, and the political and military response. the loss of life was grievous. few of us will forget the sights we saw on our tv sets that day. and for those most closely involved the feelings must still be of the utmost intensity. standing back, from an economic perspective i would say that the most serious impact has been on sentiment, particularly in the united states. consumer confidence there has fallen quite sharply. equity prices dipped in the immediate aftermath of the attack, the sterling price of oil has fallen by some 18 % since the start of september, and credit spreads have risen. of course, equities have since rallied strongly, with the ftse100 for example now back above its pre - september 11th levels. but substantial uncertainties remain. at the very least, firms and households are likely to delay major expenditure decisions until things become clearer. and this may act as a drag on the recovery in activity. the rise in the cost of security and insurance will also probably have a more long - lasting effect on activity. discussion of the attacks has somewhat obscured the fact that the world economy seemed to be slowing more rapidly than expected even before 11 september. overall activity in the us had been weak, despite continued strength in some sectors, notably retail. and the euro area grew by just 0. 1 % in the second quarter, as net trade slowed sharply. the monetary policy reaction has of course been rapid. in the united states, in particular, interest rates have already been reduced by four percentage points since the start of the year. and fiscal policy has been expanded. these actions should clearly stimulate demand. but, as is always the case, the size and timing of these effects is extremely hard to judge. so far this year, the uk economy has fared rather better than its main trading partners. gdp growth has slowed from the peaks it reached during 2000. but the economy still grew by 0. 6 % in the first quarter of this year, and 0. 4 % in the second. much of that strength, of course, reflects domestic demand growth, and particularly household consumption,

. but we are also able to call on our network of regional agents, who talk each month to a wide variety of companies, including, i know, some of you. it is clear from the agents'reports that the confidence of many of those they speak to has been hit in the aftermath of the terrorist attacks. labour hiring and discretionary spending decisions may be deferred for a while, whilst the situation becomes clearer. and investment could be reduced if businesses look for a higher return to cover any increased risk. what does all of this mean for inflation? so - called'upstream'prices - including raw material costs and factory gate prices - remain very subdued. some business costs, such as insurance, will rise, but that should be at least partially offset by the sharp fall in oil prices. rpix inflation rose briefly above target in august, but fell back to 2. 3 % in september. we are just starting to put our next formal inflation forecast together, and you will be able to see the results of that exercise in the november inflation report. at this point, i know you would wish a crisp conclusion and some indication of where i think rates should move in the future. some of you may even think you have detected clues in what i have said as to where i think rates should go. if you have, though, that would be an over - interpretation. there are, i think, clear downside risks. the world economy may slow further if adverse confidence effects persist. spending which is currently delayed may be cancelled. and the labour market may begin turning more decisively in the uk. but for the moment these risks need to be weighed against the continued strength of domestic demand. of course, if we are to meet our inflation target, a strong domestic economy will be needed to offset the weakening influence of overseas markets. we have cut interest rates by 150 basis points since the start of the year in part to achieve this, and the full effect of these reductions have still to come through. all this will make for an interesting november round where, as i indicated earlier, we will look carefully at all the data, making our decision firmly in the light of the inflation target we have been set. maintaining financial stability having discussed monetary policy, i now want to turn to the other key role of the bank of england - that of maintaining stability in the overall financial system. this does not, of course, mean that we supervise individual banks, building societies and investment firms. since