to employers. as a result, companies have scaled back their demand for labour and looked to raise prices. the risks to money spending, inflation expectations and cost pressures were not overlooked by the mpc and were explicitly identified as upside risks to inflation both in speeches and in our monthly minutes back in 2005. in the event, the upside risks to inflation did materialise to some extent. and a year ago, the mpc thought the risks to gdp growth were on the downside. yet, the total output of the uk, leaving to one side the energy sector, has been rising at an annual rate of over 3 %. and over the past month some of the key spending and activity indicators have been strong. the balance of risks to output growth and inflation has shifted towards the upside. as those risks began to materialise, the mpc acted. the committee started to raise interest rates to deal with the changing balance of risks last august, and has now raised rates by 75bp in total to keep inflation on track to hit the target. but, by responding early to changes in the inflation outlook, the mpc ultimately needs to raise interest rates by less than would be the case if we delayed. looking forward, some of the factors responsible for the pick up in inflation through 2006 are likely to unwind during 2007. oil prices have fallen by around a third since august, and will feed through to petrol and utility prices. the rise in the exchange rate will dampen the impact of higher import prices. it is also important not to exaggerate the effect of stronger demand on inflation. as we pointed out in our november inflation report, the ability to recruit migrant labour continues to offer a safety - valve for demand pressures in the economy, and is, no doubt, in some part responsible for the continued muted level of wage pressures. that is a particular help in present circumstances, and has reduced the extent to which interest rates have needed to rise. but how quickly and by how much inflation will fall over the next year or so is difficult to judge. falls in some important prices, such as petrol and utility charges, mean that people will have more disposable incomes to spend on other goods and services. that may encourage producers of those goods and services to raise prices. equally, companies will be under less pressure to reduce other costs, affecting their response to upward pressures on earnings growth. the committee will be monitoring carefully the outcomes month by month. all i can say is that the committee

blown across the world economy with the advent of china, india and much of the former soviet union into the world trading system. to their great credit, business people and politicians have not resisted changes to the structure of the british economy, unlike many of their counterparts abroad. as a result, total output and employment here have grown rapidly, and our living standards are higher than could have been sustained with policies aimed to defend the old industrial structure. those changes, however, have led to the closure of many manufacturing companies. there are over a million fewer people employed in manufacturing now than a decade ago, and 200, 000 fewer in the west midlands. it is just over a hundred years since car production started at longbridge, just over thirty years since it was nationalised, and no vehicle has been built there for over a year. but there are also many success stories. since i became governor, i have made regular monthly visits to the regions and countries of the united kingdom, and visited around one hundred companies, large and small, new and old. i have been impressed by how they have focussed on products in which they can add value and exploit their comparative advantage – whether a company in northern ireland exporting wall heaters to the newly rich of shanghai and beijing, a manufacturer in the north - west exploiting a patent for paint which is resistant to very high temperatures, or a company in the potteries passionate about the plates they make for the hotel and restaurant trade. and if you want a digger, why look further than a jcb? proof that vehicle assembly in the west midlands can be successful. all of them – as all of you – are working in a highly competitive environment. it is indeed much harder to run a business than to run a central bank. but seeing those companies at first hand has made me even more convinced that our duty is to ensure that you do not experience the macroeconomic instabilities of the past and that we keep inflation on track to meet our 2 % target. stability is in your interest just as much as mine. speeches on monetary policy rarely whet the appetite for a good meal, and i apologise for that before the splendid dinner your chamber is about to serve. but tonight has been an opportunity to share our analysis of the economic situation with you. i hope you will understand the reasons behind our decisions to raise interest rates over recent months, even if it goes against the grain to support them. long before i became governor i said that my