rate. the natural counterpart to that would be a real depreciation of sterling in order to improve uk international competitiveness, boosting net exports and leading to a re - balancing of the composition of output away from meeting domestic needs and towards internationally tradable sectors. moreover, the crisis has probably also resulted in a loss in net foreign earnings by some parts of the financial sector, necessitating an even larger decline in the real value of sterling to re - balance the economy. in order to get a handle on the likely impact of the depreciation of the exchange rate, we can follow a couple of approaches. one approach is to compare inflation rates here with those in other jurisdictions with stable exchange rates. as the euro area suffered a broadly similar fall in activity to the uk, is similarly exposed to global price shocks, and probably has a similar inflation process, it represents a natural comparator. the goods price inflation differential between the united kingdom and the euro area is shown by the green line in chart 7. a second approach is to compare the inflation rates of services with that of goods in the united kingdom. as goods are typically more import - intensive than services, the inflation rate of goods should rise relative to that of services after depreciations and vice versa ( there is a differential between the two on average, because productivity tends to rise faster in the goods sector than in the services sector ). the inflation rate of goods ( excluding energy ) relative to that of services is the blue line in chart 7 and has the same general profile as the green line. that is somewhat reassuring, since there are factors other than the exchange bis central bankers ’ speeches rate that could affect one or other of these relative inflation rates, but usually not both together 4. the fact that the two series move broadly in step suggests that the exchange rate is probably a dominant common driving factor. if one has an estimate of the relative import intensities, then one can go a bit further and back out a direct estimate of the contribution of the exchange rate to inflation 5. input - output data suggests that goods are between two and three times more import intensive than services. the implied contributions of import prices to inflation under these two assumptions are shown in chart 8, with import prices contributing between 2 and 3 percentage points to inflation in late 2009 / early 2010. back in 2009, our central view, embodied in successive inflation report projections, was for inflation to oscillate around the 2 % target over the

mr. george comments briefly on the global economy and on recent economic performance in the united kingdom speech by the governor of the bank of england, mr. e. a. j. george, at the dinner with the lord mayor for bankers and merchants of the city of london on 11 / 6 / 98. the past year, since we last enjoyed the generous hospitality of the mansion house, on this great city of london occasion, has been a testing time. it has been characterised by major imbalances in both the global economy and here in the united kingdom - which have complicated the task of policy - makers everywhere, including the task of the bank of england ’ s now legitimised monetary policy committee. internationally there has been good news in the enviable performance of the united states - goldilocks - economy, with continuing robust domestic demand growth and further falls in unemployment, with so far remarkably little inflationary pressure. to the extent that this performance can be sustained, it provides substantial underpinning for the global economy as a whole. and there has been encouraging news, too, in the re - emergence of domestic demand growth in the continental european countries as they prepare to take the final step to monetary union. that is a promising context for the launch of a strong, credible, currency and i wish the european central bank every success in its historic task. domestic expansion with monetary stability within europe is in the interest of us all. elsewhere though the international situation has been decidedly less benign. a combination of financial fragility and weak business and consumer confidence has weighed heavily on the japanese economy, and on the yen ; and the financial thunderstorms, which broke initially last year over a number of other countries in asia, are still intermittently rumbling around the region and elsewhere. the economic fallout from these developments poses a serious downside risk to the growth of world activity and threatens the emergence of potentially large international payments imbalances. it is a dangerous environment. all of this has prompted a far - reaching re - examination of the international monetary structure, and in the meantime it presents the international monetary authorities with some difficult immediate management challenges. it also, of course, represents an uncertain international background for the conduct of monetary policy in this country. our own overall economic performance over the past year was again very encouraging. output growth ( on the latest data, to the first quarter of this year ) was 2. 9 % significantly above the rate of inflation ( measured by the gdp deflator