will follow the creation of the prudential regulation authority. the challenge facing monetary policy is obvious – the combination of high consumer price inflation and weak economic growth. both of these might seem surprising given the large amount of spare capacity in the economy. but the rise in world energy and other commodity prices, and the need to reduce both the external and budget deficits, are squeezing real living standards, pushing up on consumer price inflation and slowing domestic consumption. the big picture is that the uk economy is going through a major rebalancing of demand and output, from private and public consumption to net exports and business investment, which will take several years to complete. a necessary precondition for that rebalancing was a fall in the real exchange rate. markets anticipated that need. the nominal effective sterling exchange rate fell by around 25 % between the start of the crisis in 2007 and the beginning of 2009, since when it has been broadly stable. the monetary policy committee ( mpc ) decided to look through the first - round effects of this depreciation on the price level. we could have made a different judgement. we could have raised bank rate significantly so that inflation today would be closer to the target. but that would not have prevented the squeeze on living standards arising from higher oil and commodity prices and the measures necessary to reduce our twin deficits. and it would have meant a weaker recovery, or even further falls in bis central bankers ’ speeches output, despite our having experienced the worst downturn in output and spending since the great depression. to force nominal wages below their already depressed level would have meant much higher unemployment, a greater erosion of living standards, a marked degree of “ undesirable volatility in output ” ( contrary to our remit ), and a risk of inflation falling well below the target in the medium term. with the freedom granted from having our own currency, the mix of tight fiscal and loose monetary policy is necessary for a rebalancing of the economy. because of the measures taken to reduce the enormous fiscal deficit here at home, uk sovereign debt funding costs have actually fallen relative to those in germany since the start of last year. of course, there can always be differences of judgement about the overall stance of policy, but to change the broad policy mix would make little sense. of course, at some point, bank rate will need to rise to more normal levels in order to ensure that inflation returns to its 2 % target. there has been,

, and thereby tends to lower demand for u. s. goods and services. that being said, i would note that the value of the dollar does not appear to play much of a role in explaining the decline in u. s. exports over the past year. the current level of the trade - weighted dollar is about where it has been, on average, over the past few years. however, looking back several years, the 25 percent appreciation of the dollar that occurred in 2014 was an important contributing factor to the previous noticeable decline in u. s. exports that took place in 2015 and 2016. global financial markets also link the united states to the global economy, and developments abroad can spill over into domestic financial conditions, with material effects on domestic activity. this is particularly evident during episodes of global financial stress, in which “ risk - off ” shifts in sentiment can depress u. s. equity prices and widen domestic credit spreads even as flight - to - safety flows push down u. s. treasury - 5yields. these global financial spillovers to the u. s. economy were notably pronounced during the 1998 russian crisis, the euro - area debt crisis earlier this decade, and the china devaluation episode of 2015 – 16. recently, global financial spillovers have contributed to the significant decline in u. s. treasury yields that we have seen since the spring. since the market for debt is global, low — and, in many cases, negative — yields abroad encourage capital inflows that put downward pressure on u. s. yields. equity prices have also reacted to global developments and recently appear particularly sensitive to news about the outlook for u. s. international trade. global factors have likely also contributed to the estimated decline in the neutral rate of interest, or r *, that we have observed in the united states and many other countries. slow productivity growth and population aging have lowered potential growth rates in major foreign economies, decreasing demand for investment and increasing desired saving, both of which have contributed to lower equilibrium interest rates abroad, with spillovers to the rest of the world, including in the united states. 4 global developments influence not only u. s. economic activity and financial markets, but also u. s. inflation. global factors — through their influences on u. s. aggregate demand and supply that i just described — can alter u. s. inflation dynamics. foreign factors can also directly affect the prices paid by u. s. firms and consumers, particularly, but