though financial markets, certainly, now that the war has started, have factored in its rapid conclusion. i hope they prove to be right - for more than purely economic reasons. notwithstanding these risks, i still think that the most likely outcome is that we will see a gradual pickup in the pace of global recovery over the next year or two - which is the view shared by the monetary policy committee in our february inflation report and by most other economic commentators. on that basis we would also expect to see a gradual recovery in domestic business investment as we go through this year and into next. and, while fiscal prudence is clearly important for the stability and efficiency of the economy over the medium term, the chancellor's projected increase in public spending is in my view positively welcome in the immediate situation confronting us. taken together, these developments should accommodate the moderation in the rate of growth of consumer spending, which we anticipate and may now be beginning to see. in the meantime we have seen a rise in the rate of inflation - to 3 % on the target measure - driven notably by last year's sharp rise in house prices and by the rise in the oil price in the run up to the invasion of iraq. and it may well rise somewhat further, for example, as a result of the prospective rise in council tax and the somewhat weaker exchange rate. but most of these influences at this stage seem likely to be largely one - off effects on the level of retail prices, rather than persistent influences on the rate of inflation. there is no significant evidence at this point of continuing, second - round, effects, for example in the labour market, so that inflation seems likely to fall back to the 2½ % target rate in the course of next year. on this basis - and although the mpc will of course be monitoring the inflation prospect very carefully we concluded at our most recent meeting that policy should remain on hold. mr chairman, you can see that i meant it when i said earlier that we haven't yet reached the promised land! we have in fact been going through a difficult patch, and we remain heavily dependent upon developments abroad which are beyond our control. certainly we face risks and uncertainties in the short term. but it is important that we don't exaggerate those risks and allow them to cloud our judgement. the more likely outcome in my view - looking ahead over the next couple of years - and reflected in the inflation report - is for inflation close to target

could do to influence the international environment. the problems originated abroad and we could not avoid their effects. what we could do - and what we have tried to do - was to seek to offset those effects, and compensate for the external weakness, by stimulating domestic demand here in the uk. given weak business confidence, that meant essentially, in the case of monetary policy, encouraging the growth of consumer demand - by cutting interest rates to their lowest level in 40 years. in the event we managed - just about - to avoid recession over the winter of 2001 / 2002 but we did so but at the cost of growing imbalances within the economy between domestic and external demand on the one hand and, domestically, between consumption and investment on the other. essentially we took the view that unbalanced growth was better than no growth at all - which was the only other option we had. this " two speed " economy has, i know, been reflected in the pattern of your own activity as fla members, with consumer finance volumes growing strongly in recent years where business volumes have been relatively flat. in the past year alone new business written to consumers was nearly three times that written to business customers. now clearly the imbalances can't go on increasingly indefinitely. the build - up of household debt and the related strong rise in house prices we saw last year in particular must begin to moderate at some point. so much of the recent debate has been about whether the eventual adjustment will occur gradually, within the context of continuing overall expansion, or more abruptly in which case the overall expansion could prove more difficult to sustain. on the macro - economic data it seems clear that the global economy in fact bottomed out around a year or so ago, and that we have since seen the beginnings of a recovery, notably in the us, on which so much of the rest of the world currently depends. and it is also clear that monetary policy generally and in some countries also fiscal policy - remains supportive. on that view, and given the recent moderate decline in sterling's effective exchange rate, it is reasonable to look forward to a gradual improvement - and i emphasise gradual improvement - in the external environment which would clearly be very helpful from a uk perspective. i don't deny that there are downside risks to this scenario. the eurozone has for example recently put back its projected expansion until later this year. and financial markets, and both business and consumer sentiment, have recently been severely affected by uncertainty over iraq -