we are likely to see some combination of stronger consumption growth and higher medium term inflation. this scenario, which i see as quite likely, would reinforce the case for raising uk interest rates to head off inflationary pressures. economic growth and uk monetary policy the uk ’ s monetary policy framework is focussed on the objective of price stability, which is currently defined in terms of a 2 % target for cpi inflation. there are good reasons why we have made the achievement of price stability the centrepiece of monetary policy here in the uk, and why many other countries follow the same approach. while monetary policy can affect the growth rate of the economy in the short term, over the medium to long term, economic growth is driven by supply side factors – enterprise, innovation, investment and skills. attempts to boost growth solely by loose monetary policy policies – which we experienced in the 1970s and the late 1980s – ended up creating greater economic instability and almost certainly hampered longer - term growth prospects. the best contribution that monetary policy can make to supporting the underlying forces of growth is therefore by fostering a climate of stability – primarily in terms of the level of prices but also by seeking to promote a relatively stable demand climate and by avoiding potentially destabilising lurches in policy. as i have already noted, the need to stabilise the uk economy in the face of a massive global financial shock in late 2008 and early 2009 fully justified the large cuts in bank rate and the injections of quantitative easing that the mpc made at that time. but now the economy is growing again and inflation is running persistently above the 2 % target, such a large degree of monetary stimulus is no longer appropriate and is in danger of creating more instability in growth and inflation, rather than stabilising the economy as monetary policy should. one justification which is frequently used for maintaining current monetary policy settings is the “ output gap ” model of the inflation process. according to this view of the world, stabilising growth and keeping inflation on target are two sides of the same coin. weak growth builds up a margin of spare capacity which then pushes down on inflation, whereas strong growth is more likely to be associated with above capacity working and a build - up of inflationary pressures. the uk economy appeared to conform to this model for the first decade of the mpc, but recently it has broken down and is no longer acting as a reliable guide to policysetting. bis central bankers ’ speeches in a speech last month, i set out

activity ( above 50 indicates expansion ) expansion manufacturing services contraction source : the chartered institute of purchasing and supply uk economic growth prospects looking ahead to this year and next, current forecasts for economic growth are relatively subdued at present. the latest cbi forecast, for example, predicts growth of 1. 8 % this year and 2. 3 % next year and these figures are very close to the current consensus forecasts of growth for this year and next – 1. 9 % in 2011 and 2. 1 % in 2012. most forecasters expect the manufacturing sector to continue to perform strongly, supported by strong growth across the world economy. chart 4 – uk and world economic growth annual percentage change in real gdp - 2 uk world ( uk trade - weighted ) - 4 - 6 note : 2011 growth rate for the uk are consensus forecasts ; those for the world are imf forecasts. source : ons, imf world economic outlook, consensus economics bis central bankers ’ speeches while the impact of the recent japanese earthquake and tsunami is very tragic and we are likely to see continued political turbulence in middle east and north africa, i would expect these developments to have only short - term effects on global growth. the economies of asia and other emerging markets are likely to continue to provide strong momentum to global growth, and the gradual recovery which is emerging in the united states and continental europe should continue to gather momentum. as chart 4 shows, the growth of the uk economy follows quite closely the trade - weighted average of our major trading partners – and the imf and other economic forecasters are projecting the continuation of relatively strong growth across the world economy this year and next. business investment should also be a positive force for growth over the next couple of years. the latest cbi industrial trends survey showed the strongest investment intentions in manufacturing industry since 1997 and the bank of england agents ’ reports also indicate healthy investment intentions ( see chart 5 ), in both the manufacturing and services sectors. many companies are dusting off investment plans that they put on hold in 2008 as the economy moved into recession, and the latest gdp figures show a 10 % rise in business investment has already taken place over the past year. chart 5 – investment intentions * bank of england agents ’ scores - 1 - 2 manufacturing - 3 services - 4 - 5 * : investment intention scores reflect firms ’ expected expenditure over the next 12 months. source : bank of england so if the world economy is growing healthily and investment is rebounding, why is uk economic