and rigidities in the labour and product markets that limit mobility and competition is essential for infusing new dynamism into the european economy. such dynamism should to help boost aggregate demand. there is not enough time for me to address the necessary structural reforms. i should say, however, that, by improving the functioning and expanding the productive capacity of the euro area economy, greater market flexibility and higher productivity growth would also enhance the scope for monetary policy ’ s scope for supporting stronger demand without jeopardising price stability. in the united states, our central bank colleagues have been able to strengthen economic activity while maintaining low inflation because of the american economy ’ s flexibility and high productivity growth. 1 overall, the medium - term outlook for price stability is favourable and the prospects for stronger and broad - based growth are encouraging. needless to say, we will continue to monitor carefully all developments that might affect our assessment of the risks to price stability. this leads me straight to my next point. 2. fiscal developments and the single monetary policy at present, fiscal developments in the euro area pose a very serious challenge to economic and monetary policy in europe. we - and i can speak for all my colleagues on the governing council view this matter with deep concern. observing the manner in which the debate has evolved, and the public discourse surrounding it in several member states, some of us have a sense of deja vu - a feeling that we have experienced it all before. the process of widening budget deficits and the transmission of their effects on long - term growth is usually gradual. the anticipated short - term positive effect of deficits on aggregate output is often supported by arguments focusing on their immediate direct impact while neglecting their indirect and long - term unfavourable consequences. since the process is gradual, there are often, depending on the prevailing economic situation and the initial fiscal position, no visible strong indications of the ultimate adverse effects of persistently high budget deficits. as paul volcker once said : “ things continue in government unless you feel a crisis. in fact, we didn ’ t have a crisis, so the deficit persisted. ” as we know from experience in many countries, the necessary adjustment for correcting growing and persistent fiscal imbalances can be painful. moreover, in situations when the initial fiscal position of a country is unsatisfactory, as reflected not only in the budget deficit but also in the public debt - to - gdp ratio and the size of the unfunded

euro area, and news about brexit. households looked through brexit - related uncertainties initially. but as the consequences of sterling ’ s fall showed up in the shops and squeezed their real incomes, they have cut back spending growth to rates about one half of those pre - referendum. businesses have been somewhere in between. since the referendum, they have invested much less aggressively than usual in response to an otherwise very favourable environment – with global demand growing strongly, limited spare capacity, relatively high rates of return on capital and the low cost of finance – reflecting the drag from brexit - related uncertainties. evidence from the bank ’ s decision maker panel survey indicates that drag took 3 - 4 % off business investment last year. that effect persists, though it has not intensified. as the committee has repeatedly stressed, how the economy evolves will depend on how these expectations change as brexit progresses. on the one hand, increased caution could drag on demand. on the other, if there is progress towards the new, deep and special partnership the government is seeking, a boom in investment and potentially consumption could be unlocked, boosting output. from a monetary policy perspective, the bank is ready for brexit. the mpc is well - prepared for whichever path the economy takes. we have the tools we need. we will be prudent not passive. we will respond to all speeches are available online at www. bankofengland. co. uk / speeches any change in the outlook in these exceptional circumstances to bring inflation sustainably back to target while supporting jobs and activity, consistent with our remit. our guidance means that those who follow us will be better able to anticipate our actions. it will make those actions more powerful. and it will help households and businesses consume, save, hire and invest with confidence as the uk determines its path forward. thank you. all speeches are available online at www. bankofengland. co. uk / speeches appendix frequently, the economy experiences shocks that drive inflation and output in the same direction. these shocks to aggregate demand can include variations in government consumption, households ’ desire to consume, or business ’ desire to invest. increases in demand put pressure on the use of resources, causing prices to rise. because monetary policy can also influence demand it can lean against such shocks. if successful, it can stabilise inflation. in this case, no output - inflation trade - off arises. this is the so - called