the rt hon sir edward george : report on the state of the uk economy speech by the rt hon sir edward george, governor of the bank of england, at the chartered institute of bankers in scotland biennial dinner, glasgow, 20 january 2003. * * * mr president, my lord dean, my lords, ladies and gentlemen, may i begin, mr president, by thanking you and the members of the council for your great kindness in conferring the honorary fellowship of the institute on me this evening. i very much appreciate the honour it represents - and it is indeed a great honour for a sassenach. but even more than that, for me it symbolises the broader - and very longstanding - fellowship between the bank of england and the banking community here in scotland - a fellowship, and indeed a friendship, which i myself have so much enjoyed ever since i first began my regular visits here over 25 years ago. as i move towards my retirement this evening will serve as an enduring reminder of the warm personal and professional relationships - with the bankers in scotland, including many of you here this evening - that i have been privileged to develop over that time. and i will wear your - in fact i can now say our - splendid new tartan with both pleasure and pride. this is the fifth occasion in just the past eight years on which i've had the pleasure of giving this biennial report on the state of the uk economy to our scottish stakeholders. on each previous occasion i have been able to report to you relatively steady growth of overall output, a continuing fall in unemployment and stable low inflation. but i've then gone on to discuss the risks and uncertainties ahead and to worry out loud as to whether or not we could keep it up. on each occasion i have concluded - usually somewhat tentatively - that we could. and indeed we have in the uk - as a whole, though i have to admit it was a close run thing last winter in the wake of the unexpectedly sharp economic slowdown that hit the whole of the industrial world from the beginning of 2001. despite that global economic shock - which produced near - simultaneous recession in the world's three largest economies, the us, japan and germany - we in the uk - at the overall, aggregate, level have now enjoyed continuous quarter by quarter growth at an annual average rate of 2¾ % throughout the past 10 years. that is far and away the longest period of consecutive quarterly growth since quarterly estimates began nearly 50 years ago - and

slowing down. so it is not all obvious to me at least that the household sector will suddenly run for cover in the current environment, where the labour market remains remarkably robust, and the prospect for inflation - and hence the prospect for interest rates - remains relatively benign, remaining somewhat above target in the near term but moving down gradually as we move into next year. i don't say that things could not turn out rather worse than that - and there are other uncertainties, like development of the exchange rate, or the effect of the upcoming increase in national insurance contributions, which i have not touched upon this evening. uncertainty is a fact of economic life. but i do say that it would be unwise - as some have implied - to set monetary policy on the basis of the worst possible outcome, even if one knew what that would actually mean in policy terms. at the time of our last inflation report published in november the mpc's collective view of the most likely outcome for the uk, looking over the next two years, was for growth at around trend with inflation close to target. but we were - and we remain - acutely conscious of the uncertainties and risks around that prospect. and we review the position intensively both at our regular monthly policy meetings and in the context of our quarterly forecasting round. and in that context, i give you my assurance that, despite the fact that we have not changed interest rates now for over a year, we stand ready to do so at any time if and when we see the risks to our central expectation beginning to crystallise in either direction. mr president, let me conclude by suggesting once again this year that yes, we can keep the uk economy moving forward, but i don't pretend that it will be easy. sadly i am attending this dinner for the last time as governor this evening, so i will not be accountable to you for how we get on. but i will leave the bank of england in the good hands of my successor, mervyn king, when i step down in june, and i have every confidence that he will, by the time of your next dinner, have a positive story to tell.