though there is necessarily a lot of uncertainty bis central bankers ’ speeches around that estimate. the slack appears to be concentrated largely in the labour market, as survey measures indicate that businesses are operating at close to normal capacity ( chart 7 ). broadly speaking, we will be aiming to absorb that slack over the next two to three years, while keeping inflation close to the 2 % target. of course, output can rise by more than 1 – 1½ % before slack is eliminated because supply generally rises over time as well as demand. the extent and pace of any rebound in productivity will consequently be crucial in deciding how quickly slack gets absorbed. in our latest projections ( charts 8 and 9 ), conditioned on prevailing market interest rates, the central path for inflation remains close to the target throughout, while the margin of slack is diminished, though not quite eliminated, by the time the forecast horizon is reached. that market curve implies a first rise in bank rate in the spring of 2015, though i should stress that we are likely to learn a lot between now and then about the pace of the recovery, the amount of slack and the evolution of supply, and the impact on costs and prices. so i would counsel against getting too hung up about the precise date at which bank rate first rises. what, i think, is more useful for businesses to hang on to is our expectation that when bank rate does rise, it will probably do so only gradually and to a level that is likely to remain materially below its pre - crisis average of 5 % for some while – i have something like a 2 – 3 % range in mind here. that reflects three factors. first, the process of private and public balance sheet repair will continue to weigh on domestic demand for some time, while the recovery in the euro area – our main export market – is likely to remain muted. second, global longer - term safe real interest rates fell in the years before the crisis, reflecting in particular the unusually high saving rates in china, and this is likely to persist. third, the spreads between risky market interest rates and bank rate are unlikely to return to their excessively compressed pre - crisis levels. so even if we start to withdraw some of the exceptional monetary stimulus in the not too distant future, you should not expect bank rate to shoot straight back up to pre - crisis levels. it is now five years since we cut bank rate to its historic low of 0. 5 % and launched our asset purchase programme ( qe ). those

house of representatives, february and mculley, p and touli, r ( 2008 ) “ chasing the neutral rate down : financial conditions, monetary policy, and the taylor rule ”, global central bank focus, pimco. another reason reflected in the curdia and woodford ( 2008 ) paper is the fact that borrowers and savers have different propensities to consume. consequently a change in spreads will affect the “ average rate ” faced by borrowers and savers in a different way from a change in the policy rate. based, for example, on brigden, a and mizen, p ( 1999 ) “ money, credit and investment in the uk corporate sector ”, bank of england working paper number 100. about such estimates but, for what it ’ s worth, they indicate a material tightening from this source. alternatively, that can be thought of as being equivalent to a fall in the real risk - free rate of interest that would equilibriate supply and demand. 11 taken on its own, this rather leans against the proposition, advanced by a number of commentators, that monetary conditions are loose on the grounds that deducting cpi inflation of between 4 and 5 % from a bank rate of 5 % leaves a “ real rate ” close to zero. first, as i have been arguing, it is vital to take into account the possibility that the real rate warranted in the current conjuncture has fallen. second, headline cpi might not be the best deflator for calculating the relevant real rate of interest. cpi may not necessarily be the price – the “ own real rate ” – relevant for individual households ’ and businesses ’ spending decisions. 12 for example, firms ’ investment might be more dependent on the price of capital goods. despite the pickup in oil prices, the pace of inflation for capital goods has been much lower than for cpi. so that might suggest a correspondingly higher real rate for businesses than one based on cpi ( chart 4 ). a similar question could be posed about the real rate facing households, given that the cpi currently excludes the costs of owner occupation. so one can safely conclude that it is not all straightforward at present to calibrate monetary conditions. for researchers, that underlines the importance of renewing work directed at gauging monetary conditions. a recent paper by michael woodford 13 concluded that information from money and credit quantities could not add anything to spreads ; and, what is more, that they were not