Economic Imbalances and UK Monetary Policy

In this speech, Christopher Allsopp discusses UK monetary policy in the context of emerging global and domestic imbalances, outlining the kinds of responses that should be anticipated under the present monetary policy framework. Negative shocks from the world economy bear particularly hard on the manufacturing and traded goods sectors but, since they lower inflationary pressure, lead to an offsetting policy of lower interest rates. To an extent, the present two-speed economy is the result. But the domestic imbalances also reflect the more long-standing problem of the rise in sterling since 1996, especially relative to the euro. It is argued that a significant depreciation of sterling, a risk given present imbalances, need not, under present circumstances, lead to a major increase in RPIX inflation and, moreover, that a once-and-for-all rise in prices due to a depreciation is not inconsistent with the United Kingdom's inflation target, provided policy is non-accommodating against second round effects. On a third aspect, it is suggested that the main risk from buoyant consumer demand and low savings in the short term is a substantial slowdown later which could imply an undershoot of inflation below target unless corrected by policy action. It is stressed throughout that a major stabilising force in the world economy and in the United Kingdom is the expectation that policy will act to keep output close to potential and inflation on target