the monetary policy committee with a situation in which the overall economic slowdown which we had been seeking to engineer, in order to prevent accelerating inflation, threatened to become an unnecessary economic downturn likely to produce an unwanted fall in the rate of inflation to significantly below the government ’ s 2½ % inflation target. at the trades union congress in blackpool last september i had emphasised that our inflation objective was symmetrical, and promised that if overall demand threatened to fall significantly below the supply capacity of the economy, with the risk that we would fall short of the inflation target, then we would be just as vigorous in reducing interest rates to stimulate demand as we had been in raising them when the risks to inflation were on the upside. so, in the new situation, the monetary policy committee promptly reversed engines to pump up demand, cutting rates by 2¼ % over the next few months to as low as they have been since 1971. ( this relatively aggressive response was not incidentally – as is sometimes suggested – a sudden conversion to a more activist philosophy, simply a reflection of the rapid decline in the economic prospect which required a strong response. ) since last autumn the world financial and economic situation has certainly stabilised under the impact of the continuing strength of domestic demand in the us economy and of the beginnings of export - led recovery in a number of emerging markets, particularly in asia. and world commodity prices, notably the price of oil, have shown signs of strengthening. but global imbalance seems likely to persist for some time, with domestic demand growth still relatively sluggish in japan, and in the eurozone taken as a whole. this imbalance, in turn, is a significant influence on the international pattern of interest and exchange rates. it is hugely important for the future strength of the world economy that as domestic demand growth in the us moderates – as it almost certainly will, one way or another – domestic demand growth in the other industrial countries accelerates to take up the slack. here in the uk both business and consumer confidence have improved since the autumn and overall output growth seems set to recover, on the back of accelerating domestic demand growth, to around its long term trend by about the middle of next year. but we, too, are having to continue to cope with the imbalance between the domestic and internationally exposed sectors of the economy as a result of continuing relative demand weakness in some key overseas markets and of relative price effects resulting from a renewed rise in the exchange rate, which, despite the sharp reduction in

we implement this strategy successfully, we will be able to provide more durable support for demand and activity. if, by contrast, we were to adopt a course that let the inflation genie out of the bottle, we would find ourselves needing to tighten policy, exacerbating the slowdown in activity. that broad strategy is not a recipe for inaction. the central projection in february ’ s inflation report was for inflation to return to close to the 2 % target over the coming two to three years, conditional on the market ’ s expectation of further cuts in bank rate. but nor does the strategy determine a definite path for bank rate over the coming months. each of us on the mpc must form a judgment month by month on which of the risks to the inflation outlook – from financial conditions or from rising costs – is proving more potent, and so a judgment on the degree to which we can set a course that underpins demand. since the february inflation report, oil prices are around 10 % higher, and sterling ’ s exchange rate around 4 % lower, so the immediate cost pressures are worse. the good news is that, in the labour market, nominal earnings growth has so far remained subdued, notwithstanding the rise in near - term inflation expectations revealed by a range of surveys. this is perhaps suggestive of the adjustment in real take - home pay made necessary by the sharp increase in firms ’ costs due to the further rises in commodity prices. in manufacturing, firms ’ input costs have risen sharply over the past twelve months ; and output price inflation has reached nearly 6 %. a big question is to what extent competition amongst retailers will dampen the pass through into retail prices. anecdotally, retailers still sound as though they are competing fiercely on prices, and driving down other costs in order to maintain their margins. meanwhile, on the other side of the ledger, many essentially backward - looking indicators of uk real demand and activity have held up reasonably well. but we should not yet place great weight on that. it can sometimes take time for disturbances to affect real economic activity. in the united states, arguably there was quite a lag between the onset of problems in housing finance and the pass through to spending. the uk looks to be quite a lot better than the us. the latest data for q4 last year did, however, suggest that household spending on durables slowed quite significantly. and we are seeing softening in consumer confidence and property market conditions. so the picture on the real economy