the rt hon sir edward george : the economic prospect speech by the rt hon sir edward george, governor of the bank of england, at the jiji press london top seminar, london, 30 may 2001. * * * mr chairman, i am delighted to join you today for this jiji top seminar and to have this opportunity to meet with so many senior representatives of the japanese business – and financial – community here in the uk. i have chosen to speak in my opening remarks on " the economic prospect ", which today more than ever means the international economic prospect. but before i come to the immediate situation, let me say just a few words about what it is that we are all trying to achieve through our overall approach to economic management, which can perhaps best be summed up as " macro - economic stability and supply - side flexibility " – though that characterisation needs elaboration. on the macro - economic side we have learned – and it has taken some countries longer than others – that you cannot achieve what we are all trying to achieve – sustained growth, high levels of employment and rising living standards – simply by pumping up demand in our economies through expansionary monetary and fiscal policies without proper regard to the underlying supply - side capacity of our economies to meet that demand. short - term demand management through monetary policy too often led instead to accelerating inflation, and increasing external deficits, which had then eventually to be brought under control through recession – an absolute recipe for short - termism in both financial and business behaviour. equally, excessive public expenditure – which had ultimately to be financed through higher taxation – imposed burdens on the private sector which weakened its capacity to generate employment and income and wealth. so the emphasis now, throughout the industrial world but increasingly too in the developing, emerging and transition economies, is on effective price stability as the immediate objective of macro - economic policy – not simply as an end in itself but as a measure of the balance between aggregate demand and underlying supply in the economy as a whole. in effect the aim of monetary policy in particular is to moderate, rather than aggravate, the economic cycle, and so to provide the basis for sustainable growth at around the underlying rate of growth of productive, supply - side, potential. and the emphasis now in relation to fiscal policy is to limit public sector borrowing, and the outstanding level of public sector debt, to levels that can be sustained into the medium and longer term without the need for increasing tax burdens or the imposition of

in our case we have been fortunate, since being driven out of the erm in 1992 and moving to a symmetrical inflation target, in enjoying a sustained period of relatively stable economic growth. in fact we've experienced the longest period of continuous quarter by quarter growth since quarterly records began, with average annual growth at around 3 % over the whole period compared with our long term trend rate of 2¼ - 2½ %. employment has steadily increased, and unemployment has fallen to its lowest level for 25 years. meanwhile the rate of inflation has been consistently relatively close either side of the government's 2½ % target – the lowest and most stable rate of inflation that most of us in this country can remember. domestic demand growth in the uk has remained relatively robust into this year, but we too are affected by the us slowdown and by the associated weakening of equity prices. and we have had a new problem of our own in the form of foot and mouth disease, the effects of which have gone a good deal wider than just the agricultural sector. these new developments were likely to have a dampening effect on overall demand pressure within the economy, both through their direct impact and through possible damaging effects on confidence. given the fact that we started from a position in which inflation was below target ( and expected to remain so for some period ahead ) ; and given only modest upward pressure – at least so far – on wages and earnings growth, despite the continuing tightness in the labour market ; we have judged, on the information so far available to us, that we needed to reduce interest rates by ¾ % in order to cushion the impact of the global slowdown and meet the inflation target further ahead. of course i am well aware that a stable overall macro - economy does not – and cannot – mean equally stable economic conditions for every individual sector or individual business. a particular complication over the past few years has been the surprisingly persistent strength of sterling's exchange rate against the euro, itself a reflection of the puzzling more general weakness of the european currency. this has contributed to an uncomfortable imbalance within the uk economy primarily between the euro - exposed sectors, which have been under consistent pressure, and the domestically - oriented sectors, which have by and large been doing relatively well. understandably the suffering sectors and businesses – and i know that they include some japanese companies operating in this country – tend to complain that monetary policy takes too little account of their position, often pointing out that inflation has for the past two