. generalised inflationary pressures in the economy are also subdued. core inflation measures are running at 1. 3 %. that is a legacy of a long period following the crisis in which unemployment has been high and wage growth muted. 14 with additional falls in petrol prices in the pipeline, inflation is likely to fall further over the coming months and turn slightly negative for a period. it should pick up again in twelve months or so as the direct effects of a lower energy price drop out of the inflation rate. the bank has the means, will and responsibility to return inflation to the 2 % target within the next two years. that is consistent with the average horizon over which the mpc has sought to return inflation to target following overshoots in the past and with the nature of shocks the uk currently faces. the uk economy is expanding solidly. over half a million jobs have been created in the past year and there are signs that wage growth is picking up. interest rates can be expected to begin to return towards more normal levels over the next few years. relative to what we and the markets expected a year ago, that path of interest rate increases can be expected to be more gradual and more limited. 4. what is needed in the euro area? the challenges for monetary policy are much greater in the euro area than in the uk. since the crisis, euro area nominal gdp has increased by a mere 5 % in almost seven years. consumer price inflation is already below zero. core inflation has been running at or below 1 % for over a year. this is potentially dangerous. low nominal growth is intensifying the euro area ’ s debt burden ( chart 4 ). 15 the fear of stagnation is holding back spending and investment. the ecb ’ s actions last week were timely and welcome. they were also important not least because they removed any residual concerns about whether it has the will or means to meet its price stability mandate. by doing so, the ecb has reduced tail risks associated with the debt overhang to the extent monetary policy can or should. unit labour costs rose by 0. 5 % in the year to 2014q3, and unit wage costs rose by 0. 9 % over the same period, based on the mpc ’ s backcast for uk gdp. aggregate euro - area household debt was 61 % of gdp in 2007 and stood at 64 % in 2013. the corresponding figures for non - financial corporates were 94 % in 2007 and 100 % in 2013 and

in many advanced economies. 6 this is one reason why the so - called “ equilibrium ” real interest rate is negative in many advanced economies, though it has risen and is possibly now positive in others like the uk. 7 reflecting these real dynamics, central bank interest rates have had to be set at extraordinarily low levels and supplemented by large scale asset purchases simply for monetary policy to remain neutral. 8 escaping a debt trap requires a suite of measures including structural reforms to boost productivity. but above all an economy needs to be able to channel all available savings – household, corporate and foreign – to those sectors willing and able to spend. in many respects, recent progress in the uk shows how. 3. how the uk is escaping its debt trap in recent years, the uk economy has shown increasing signs of normalisation. non - financial private debt has fallen by around 30 % of gdp since its peak, the economy has grown consistently above trend, and unemployment has fallen from a peak of 8. 5 % to less than 6 % today. this performance underscores several structural features necessary to escape a debt trap. the first is an integrated financial system which channels savings from one part of the economy to investment in others. since the near collapse of the uk banking system, bold steps have since been taken to shore up its resilience. £140 billion of new bank capital has term premia, which measure investors ’ compensation for holding long - rather than short - maturity claims, are also estimated to have declined since last summer, perhaps reflecting growing expectations for central bank asset purchases. for the uk, december 2008 ; and for the euro area, june 2012. the non - financial corporate sector was a net saver in germany, ireland, spain, greece and the uk at end 2013, based on eurostat data ( esa 95 basis ). the “ equilibrium ” rate of interest is that which equates demand with potential output, thereby delivering inflation at target in the absence of “ cost - push ” shocks. as my colleague ben broadbent recently said, central banks aren ’ t the cause of low interest rates, but rather are actors reading a script written by others, broadbent, b ( 2014 ), “ monetary policy, asset prices, and distribution ”, speech at the society of business economists annual conference. bis central bankers ’ speeches been raised in recent years, and banks ’ performance in the recent uk stress test suggest growing confidence in the resilience of the system is merit