be slackening, though heavy discounting has clouded the underlying picture. there are clearer signs that the slowdown in the housing market is gathering pace. but the impact of this on consumer spending and ultimately on inflation is highly uncertain. and that is what matters for monetary policy. so growth does now seem to be slowing. but what is less clear is whether the scale of this easing is likely to be broadly what we need to keep inflation on target in the medium term – neither too much nor too little. that ’ s not just because we don ’ t know how much slowing is in the pipeline. there are a couple of other important uncertainties too. first, it ’ s hard to judge the underlying strength of inflationary pressures. when inflation picked up quite sharply last winter, there was a lively debate about how far this reflected strong monetary growth, and how far it was due to the temporary effect of a very big jump in gas and electricity prices. although inflation has now come down sharply, there is still room for debate about the margin of spare capacity in the economy. various indicators seem to be telling slightly different stories. on the one hand, overall wage growth seems to have been moderate, by past standards. on the other hand, business surveys of capacity pressures and price expectations remain above average. second, there is a lot of uncertainty about the risks to inflation, if oil prices do continue at their present levels. should we take heart from the relatively muted impact of previous increases in oil prices? or does the fact that workers had already absorbed the impact of a doubling in oil prices since 2004, even before the latest surge, make it more not less likely that they will hold out for higher pay? a key point for the mpc is that its own actions will help to determine how far oil prices have a lasting impact on inflation. there are always risks in signalling that policy will be eased, at a time of rising energy prices. this is all the more so after a year when inflation has been above target and on some measures remains uncomfortably high. on the other hand, we need to be very alert to the risk that the economy may be slowing too abruptly. at current interest rate levels, monetary policy may be on the restrictive side. and the duration and impact of financial turbulence is very hard to call. there must be a risk that at some stage it will spill over into asset and property markets more generally, and trigger a damaging loss of confidence. conclusions the mpc faces a tricky period

what are the risks that oil prices will stay around their current level for a time – and maybe go even higher? it ’ s hard to say – but the market is not discounting the possibility of even higher oil prices. options prices point to an increase in near - term uncertainty – and an increasing concern about further large price rises. using us consumer expenditure deflator to adjust for inflation. there are risks on the downside too : the last time the world economy slowed significantly, oil prices slumped. could a slowdown in the world economy cause oil prices to collapse again? projections for the growth in oil demand over 2007 and 2008 have been revised downwards a little recently. but much may depend on the pattern of any slowdown – and in particular whether china continues to expand strongly even as the us economy slows. what ’ s the likely impact of higher oil prices on the uk economy? twenty or thirty years ago, sharp increases in energy prices coincided with much higher inflation and much lower growth. over the last four years, our experience has been very different : inflation has been better behaved, and growth much steadier. there are several reasons for that, including major changes to the energy intensity and flexibility of the uk economy. but one important difference has been monetary policy. unlike in the 1970s, the mpc ’ s focus has very clearly been on controlling inflation. today, higher energy prices are an important influence on interest rate decisions. that is because they have an immediate impact on inflation, which has the potential to fuel inflationary expectations. and they may also affect the balance between overall demand and supply, though it is hard to judge the timing and size of this effect. soaring oil prices were an important reason why some members of the mpc, including myself, were reluctant to cut interest rates when the economy slowed in 2005. the policy dilemma today, in 2007, global developments – in financial and oil markets – are posing downside risks to output as well as upside risks to inflation. that ’ s a very difficult combination. so how well placed is the uk economy to weather these headwinds? as far as output goes, we start from a strong position. the latest official figures show annual growth still above its average rate, as it has been for more than a year, reflecting robust domestic spending by households and businesses as well as a buoyant world economy. but in the last month, the businesses surveys have started to weaken – a few quite sharply. and retail spending may