last year. short - term interest rates – which are currently at 5½ % – actually peaked last year at 7½ %. for much of my 37 years at the bank i ’ d have given my eye - teeth for them to trough at 7½ %. long - term interest rates, which have recently been at around 4½ %, are lower than they ’ ve been since the late 1950 ’ s. that ’ s certainly good for the economy as a whole, though i recognise that it does not necessarily feel good to people living on interest on their savings, even though those savings keep their real value far better than during the earlier period of high inflation. the public sector ’ s balance sheet is in excellent shape compared with most of the rest of the world – and the government ’ s borrowing requirement position is strong and sustainable. and the same is true of the balance sheets of the banking system, and of both the household and corporate sectors. and on top of all that, england beat the springboks at rugby – even if our cricketers didn ’ t do so well down under! yet all that one reads about – all that anyone wants to talk about apparently – is the bad news. so let me not disappoint you this evening, and now come on to the bad news. where are we now? by around the beginning of 1997 it was becoming clear that we were once again in danger of having too much of a good thing. overall output growth needed to moderate if we were not to run up against overall capacity constraints – particularly in the labour market. in fact output growth actually picked up during the course of 1997, from a rate of close to 3 % to around 4 %, partly under the impact of the windfall effect of building society demutualisation on consumer spending. aggregate demand growth, in other words, needed to slow if we were to avoid overheating, and that essentially was the background to the tightening of monetary policy during 1997 and the first half of 1998. but there was a major complication. in the autumn of 1996 sterling ’ s exchange rate against the core european currencies started to strengthen, and by early 1997 it had already appreciated by some 17 % against the deutschemark. although sterling appreciated rather less against the dollar – which also strengthened against the core european currencies over this period – sterling ’ s effective exchange rate index ( eri ) still rose by some 13. 5 %. sterling went up further against the deutsche

threatened quite rapidly to become a much sharper decline – or harder landing – than we had either expected or needed. and that, of course, is why we promptly changed our monetary policy stance as we did, cutting interest rates by 2 % to 5½ % in the space of five months. in doing so, we have demonstrated that the inflation target is – as we have frequently said it is – symmetrical, so that we would be at least as determined and aggressive in cutting rates if we thought we were likely to undershoot the inflation target as we had been earlier in raising rates to avoid an overshoot of the inflation target. so, where do we go from here? i would strongly advise you to regard anyone who claims to know with any great certainty where we go from here with the gravest possible suspicion. forecasting the economy is very definitely an art rather than a science – though some artists craft their work rather more carefully than others. but, for what it is worth, the monetary policy committee ’ s view – described in considerable detail in our recent quarterly inflation report, which i can make available to you for a remarkably modest fee if you care to get in touch with me afterwards – is that while we will not see much growth in the first half of this year – certainly in the internationally - exposed sectors of the economy – overall output growth will pick up on the back of stronger domestic demand as we move towards the millennium to around trend or above from the second half of next year. we can ’ t of course altogether rule out an actual downturn in total output over the next few months, though the odds are against that for the economy as a whole. and we are reasonably confident that the slowdown will be relatively mild and short - lived – certainly compared with equivalent periods in the past, for example at the beginning of the 1980 ’ s and 1990 ’ s. the good news is that we expect inflation to remain close to the government ’ s 2½ % target over the next two years, which should allow the relatively steady growth we have seen in the overall economy since 1992 to resume on a sustainable basis. within this overall picture, we are still confronted with the difficult problem of imbalance between external and domestic demand and the sectoral and regional stresses that this implies. at some point, as global economic activity begins to recover, we will again need to act to restrain the growth of domestic demand, but that is a problem for the future. given the present international economic environment,