mid - 2007. given our target of 2 %, the recent path of cpi inflation is uncomfortable to say the least. nevertheless, the nature of the price shocks were such that, in my view, there was little that monetary policy should or even could have done to offset them. rather, given that changes in bank rate ( or asset purchases ) take a long time to have their full effect on the economy, monetary policy needs to be forward looking, focusing on the medium - term outlook for inflation yet to come. trying to respond to every short - term movement in prices would probably be futile and would certainly involve a lot of unnecessary volatility. the remit we have from the government allows for these circumstances : “ the framework is based on the recognition that the actual inflation rate will on occasions depart from its target as a result of shocks and disturbances. attempts to keep inflation at the inflation target in these circumstances may cause undesirable volatility in output ”. 1 to meet our remit we should ideally try to look through one - off price level shocks, in either direction, only responding if there are risks to the rate of inflation expected to prevail in the medium term. that theory is all well and good : but the one thing we know about the future is just how little we know for sure. the remit for 2011 is available at http : / / www. bankofengland. co. uk / monetarypolicy / pdf / chancellorletter110323. pdf bis central bankers ’ speeches since i joined the committee in march 2009 – the very week we announced the “ quantitative easing ” programme, buying gilts in large scale – i have voted with the majority at every meeting. as a result, my individual views on policy have mostly been wrapped up with those of others in the mpc minutes and the inflation report. so today, i want to offer some more personal thoughts on how i see the economic outlook developing ; how i interpret the balance of risks to output and inflation in the medium term ; and why i have been voting for no change in bank rate or the scale of asset purchases at recent meetings. the outlook for growth the financial crisis brought with it the deepest recession the uk has experienced since at least the great depression of the 1930s. the mpc responded by cutting bank rate as low as it could reasonably go and injecting £200bn of extra money into the economy ( 14 % of annual nominal gdp ). since the

the economy. but on the other hand, the main business surveys suggest that there is little spare capacity within businesses ( chart 10 ). moreover, the expansion in output since the trough has been met by an increase in employment, rather than by productivity growth. coming to a judgment about the degree of spare capacity in the economy is therefore difficult – but at the same time crucial. given the scale of the numbers involved, small differences in the judgment about the relative roles of cyclical and structural explanations for the recent path of productivity can have enormous implications for one ’ s views of the risks to inflation. chart 9 chart 10 whole economy labour productivity per hour ( a ) survey measures of capacity utilisation by sector indices : 2006 = 100 path implied by a continuation of pre - recession trend whole economy productivity per hour ( a ) the pre - recession trend is calculated by projecting forward labour productivity from 2008q2 using the average quarterly growth rate between 1996q1 and 2008q1. sources : bank of england, bcc, cbi, cbi / pwc and ons. ( a ) includes measures of services capacity utilisation from the bank ’ s agents, bcc and cbi. the cbi measure weights together financial services, business / consumer services and distributive trades surveys using shares in nominal value added. the bcc data are non seasonally adjusted. ( b ) includes measures of manufacturing capacity utilisation from the bank ’ s agents and cbi, and a measure of non - services capacity utilisation from bcc. the bcc data are non seasonally adjusted. personally, i believe that there is a significant margin of slack in the economy – you need only look to the labour market for evidence of that. but it is also likely that there is less slack in the economy than implied by the deviation of productivity from its pre - crisis trend. looking ahead, the degree to which the margin of slack is eroded will depend on the outlook for demand. if demand recovers strongly, that would close up the degree of slack in the economy. but if demand stays weak, then potential supply will gradually respond downwards, also closing the margin of slack ( although that process would probably be slower than if it was faster demand growth doing the work ). bis central bankers ’ speeches the risks from inflation expectations are also difficult to assess, principally because we do not have good data on the true expectations of businesses and wage bargainers, only what they record in surveys