between government and individual banks will focus on lending to those sectors. there is scope for a reduction in the leverage of banks without restricting lending to the “ real ” economy. but to bring that about much of the necessary “ netting ” of exposures would be cross - border, demonstrating that almost every aspect of the present crisis has an international dimension. what is the appropriate policy response in present circumstances? some say that because the massive increase in indebtedness contributed to the crisis the right response is to save and repay debt. others argue that the only way out of our present difficulties is to borrow and spend more. who is right? both are – up to a point. we cannot avoid the necessary long - term adjustment. to pretend otherwise would only store up problems for the future. but we can try to slow the pace of the adjustment to domestic demand in order to limit its impact on output and employment. so we need to take actions now that will dampen the adjustment in the short term while recognising that the adjustment will ultimately need to be made. this is the paradox of policy at present – almost any policy measure that is desirable now appears diametrically opposite to the direction in which we need to go in the long term. spending now supports the economy, but in the long run we need to save more and borrow less. public borrowing sustains spending, but in the long run needs to fall. banks are encouraged to run down their capital to enable them to absorb losses while continuing to lend, but in the long run they will need more capital. interest rates have fallen to unprecedented levels, but in the long run will need to rise to more normal levels. in each area of policy it is important that there is a clear framework which guides both the short - term response to the current downturn and the exit strategy when normal conditions return. for monetary policy, the inflation target is that framework. bank rate is set to meet our target of 2 % for the twelve - month rate of consumer price inflation. for a decade inflation and bank rate were remarkably stable. but in only four months, the mpc has cut bank rate by 3½ percentage points to its lowest ever level of 1½ %. does this mean we have changed our target? no. we have taken those actions precisely because the sudden downturn in the world and uk economies created a significant risk that inflation would fall below the 2 % target. despite those big cuts, there remains a risk that inflation will fall

paul fisher : the economic outlook – some remarks on monetary policy speech by mr paul fisher, executive director for markets of the bank of england, to the agency for scotland, london, 23 may 2011. * * * i would like to thank ronnie driver for his help in preparing this speech. for most of us, the current outlook for the uk economy is not a very attractive prospect. after experiencing a precipitous fall in demand during 2008 / 09, the latest estimates suggest that uk output in 2011 q1 remained around 4 % below its peak pre - crisis level. the monetary policy committee ’ s ( mpc ) central projection published in its may inflation report, is for output to grow at around its historical trend rate ( chart 1 ), such that it would be mid - 2012 before that previous peak level is regained ( chart 2 ). at the same time annual cpi inflation, far from being subdued by the recession, has picked up to 4½ %. in the short - term it is likely to go higher still before, we expect, falling back towards the 2 % target ( chart 3 ). all this poses a significant challenge for policy makers, not least because of the genuine hardships slow growth and high inflation cause for businesses and households up and down the country. chart 1 chart 2 gdp projection based on market interest rate expectations and £200 billion asset purchases projection of the level of gdp based on market interest rate expectations and £200 billion asset purchases bis central bankers ’ speeches chart 3 cpi inflation projection based on market interest rate expectations and £200 billion asset purchases the recent data has not been particularly encouraging. official figures for 2010 q4 and 2011 q1 suggest that there was no underlying growth ( allowing for the unusual impact of snow in december ). and the unemployment rate remains at just under 8 %. the data may not be totally reliable – they never are – but the message we get from our business contacts in all parts of the united kingdom is not inconsistent with this broad picture painted by the official statistics. meanwhile, cpi inflation is likely to go yet higher if ( as the mpc expects ) rises in the price of energy get reflected in utility bills in due course. the largely unanticipated path of cpi inflation over the past couple of years can be explained by three factors : changes in the standard rate of vat, unforeseen changes in wholesale oil and gas prices and higher - than - expected import prices following the 25 % depreciation of sterling since