rates too have moved both up and down in order to maintain overall stability of the economy by keeping consumer price inflation close to the 2 % target. the reasons for those changes have been explained in the minutes of the monetary policy committee meetings and in our inflation report. tonight, i want to look a little further ahead, to the challenges for monetary policy posed by a third signpost - the recent fall in long - term interest rates. the development of an integrated world capital market means that these now depend on savings and investment decisions elsewhere in the world as well as here at home. investors seem to be willing to lend to governments at much lower interest rates than for many a year. in some cases they have lent money for fifty years at around 4 %, and the interest rate on long - term uk government bonds is at its lowest level for over 50 years. low and stable inflation clearly explains much of the fall in long - term interest rates which fell sharply when the bank of england was made independent in 1997. but over the past three to four years long - term interest rates around the world have fallen further to remarkably low levels. in the uk, the annual interest rate on 20 - year index - linked government bonds, after allowing for anticipated future inflation, is now around 1 %. for most of the past 25 years, that so - called “ real ” rate of interest has varied between 2 % and 4 %. long - term real interest rates of no more than 1 % would normally be a signal to spend more, save less, and to invest in physical as well as financial assets. but it is not at all clear that rates will persist at such low levels. so is this particular signpost reliable? there are broadly two types of explanation for the fall in long - term real rates around the world. the first explains low interest rates as the outcome of an increased propensity to save and lower willingness to invest in the world as a whole. the second explains them as the result of rapid growth in money and credit which, in a “ search for yield ”, drives asset prices up and interest rates down. there is no doubt that in the past few years saving has been particularly high in the asian economies. in part, this reflects their wish to build up large balances in us dollars to protect themselves from financial crises that several of them experienced in the 1990 ’ s, and also to maintain competitive exchange rates to allow export industries to absorb surplus labour. for example, although china invests

opening remarks at oenb monetary policy panel by andrew bailey given at oesterreichische nationalbank, annual economic conference, vienna published on 23 may 2022 remarks this is a time of very large economic shocks, and particularly very large external shocks, most recently from russia ’ s invasion of ukraine. i say that as someone who wholeheartedly supports the cause of ukraine and the assistance we must give. we are in a period of rapidly rising energy, goods and some food prices. these are the most visible prices too. this is by far the main cause of high inflation, and is painful, particularly for those less well off. what can and should monetary policy do? there is a very important distinction between : whether monetary policy can anticipate and stop the effects on inflation of shocks ; and, if not, whether it should respond when they happen? with shocks such as pandemics and wars, the answer to the first question is more likely to be “ no ”. but the answer to the second is very much “ yes, monetary policymakers can and must take the actions needed to return inflation to target over a period that avoids unnecessary volatility in the economy ”. it is domestic actions that have to get us back to price stability. for monetary policy, the choice of policy actions is influenced by the nature of the shock we are facing. in the uk we are facing a very big negative impact on real incomes caused by the rise in prices of things we import, notably energy. we expect that to weigh heavily on demand. we judge the appropriate degree of monetary tightening taking that into account. what i reject is the argument that in our response to covid the bank ’ s monetary policy committee let demand get out of hand and thus stoked inflation. the facts simply do not support this. on the latest number, uk gdp in march was only 0. 6 % above its pre - covid level, and it is substantially below the path it was expected to follow pre - covid. what we do have is a very tight labour market. but that does not look like a story about rapid demand growth. the labour force has shrunk by around 1 % since the onset of covid. it looks much more like an impact from the supply of labour. the job of the bank of england is to return inflation to target at a time when a very large headwind from external shocks, and an internal shock from a fall in the labour force, are reducing real