target for most of the past two years. this is not in itself a particularly powerful argument, because the undershoot has been marginal and probably owes a great deal to the unexpected strength of sterling. indeed, before we began to track a little below the target, we had for around two years been tracking above it. nonetheless, the strength of demand in the economy does seem to have exercised less upwards pressure on prices over the past two years or so than we would have expected from earlier experience ; and this applies both to prices of goods sold in the product market and to pay and earnings in the labour market. why is this? in the product market, one factor may be greater competition, which has caused producers and retailers to accept lower margins. another factor may be new forms of marketing and retailing, for example the spread of e - commerce. this may have cut the cost of distribution, and it may also have intensified consumers'awareness of prices and their resistance to price increases, by enabling them to compare prices more easily. another possibility is that we may be seeing an increase in productivity growth, perhaps stimulated by the pressures many businesses faced from the strength of sterling, and perhaps also arising from the application of it possibly the beginnings of the arrival of the new economy from across the atlantic. in the labour markets, reforms which have made possible greater labour flexibility, and competitive pressures which have stimulated firms to adapt more quickly to changes in their business environment, may underlie the more benign performance of real earnings growth. more widely, the greater stability the economy has enjoyed in recent years from the medium - term framework that governs both fiscal and monetary decisions may, by stabilising inflationary expectations at a low level, have made it less attractive, and more risky, to try to raise prices even when demand is strong, and may also have enabled industry and commerce to plan their business activities on a sounder and more forward - looking basis. there is plenty of evidence that all these factors are, in varying degrees, at work in the uk ; and they offer the prospect of genuine improvements in the functioning of the economy. but the question is - on what scale, and are the improvements temporary or here to stay? we take considerable care to try to factor these developments into our decisions on interest rates, but the difficult judgment is to assess how much faster the economy can grow as a result without jeopardising our inflation target. my own view is that supply - side improvements are delivering benefits, but

charles bean : monetary policy developments speech by mr charles bean, deputy governor ( monetary policy ) of the bank of england, at cutlers ’ feast, cutlers ’ hall, sheffield, 21 may 2009. * * * master cutler, lord lieutenant, high sheriff, lord mayor, my lords, ladies and gentlemen. i am very grateful to you, master cutler, for inviting me here to sheffield to speak at this great annual feast, to meet the leaders of such an important sector of british manufacturing industry, and to enjoy your magnificent hospitality. we are now almost two years into the financial crisis, which broke in august 2007. the preceding decade or so was marked by steady growth and low inflation, not just in the united kingdom but in many other parts of the world. in 2003, the bank ’ s governor, mervyn king, even went so far as to christen it the nice decade – standing for non - inflationary consistently expansionary. he was at pains to point out that one should not expect that unusual stability to be maintained. but although we subsequently fretted about the vulnerabilities building up within the global financial system as a result of the relaxed attitude to risk and the easy availability of credit, we never imagined quite how extreme the unwinding would prove, particularly after the bankruptcy of lehman's last september triggered a near collapse of the financial system and a world - wide plunge in business and consumer confidence. the result has been a sharp and synchronised contraction in economic activity across the globe and an unprecedented collapse in world trade. in the twelve months following the onset of the crisis, it seemed natural to expect those countries where the build - up in debt had been greatest, such as the united states and the united kingdom, and those sectors that seemed most exposed, particularly financial services and construction, to be the hardest hit. but that is not how it turned out. the fall in uk gdp of nearly 3½ % over the final quarter of last year and the first quarter of 2009 represents the largest half - yearly decline since records began in 1955. but that is comparatively mild seen alongside falls of almost 6 % in germany and nearly 8 % in japan, both countries running consistent current account surpluses. moreover, as most of you will be only too aware, the downturn has hit manufacturing especially hard, with output in that sector down over 10 % in the uk, 20 % in germany and 30 % in japan, reflecting the sharp decline in the demand for