Monetary Policy in Turbulent Times

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Presentation transcript:

Monetary Policy in Turbulent Times Harrodian School, Barnes 3rd February 2011

The end of the “great stability” Influence of global growth and inflation trends on the UK economy Globalisation and the effectiveness of monetary policy Current UK monetary policy issues

UK economic growth, 2005-2010 GDP growth, percentage change on previous quarter Source: Office for National Statistics.

UK inflation has been stubbornly high Percentage change, year on year Source: Office for National Statistics.

UK, US and Euro Area inflation rates Annual percentage increase in consumer prices Source: Office for National Statistics, Thomson Datastream.

Inflation has exceeded forecasts Annual percentage increase in consumer prices Source: Bank of England and Office for National Statistics.

The end of the “great stability” 2008/9 Financial Crisis and Recession Inflation has been high Simple “output gap” model not operating as expected Key lies in understanding how global economy has affected UK growth, inflation and monetary policy

World trade and global GDP growth Percentage change on previous year Source: IMF.

The “new global economy” Integration of China, India and other low-cost producers into global economic system Financial liberalisation and globalisation Globalisation pressures extend from trade and direct investment to labour and capital markets Rapid transmission of global shocks Demand spillovers and global inflation trends affect national growth/inflation trade-off Global monetary conditions are a powerful influence, and a potential source of economic volatility

GDP growth in the world economy Average percentage change on previous years; GDP at constant prices Source: IMF, OECD.

G20 current account balances Percent of GDP Source: IMF, October 2010 World Economic Outlook

Global energy and commodity prices 2000 =100 Source: Thompson Datastream.

Global impact on UK demand & inflation Import prices Demand conditions Exports Business confidence and investment Financial markets Global pricing climate

CPI inflation and import prices Percentage increase on previous year Source: Office for National Statistics.

UK trade as percentage of GDP Exports plus imports as % of GDP, current prices Source: Office for National Statistics.

World economic growth since 2000 Annual GDP growth rate, percent Note: 2010 and 2011 growth rates are IMF forecasts. Source: IMF World Economic Outlook, January 2011 update.

Manufacturing rebounding strongly Annual growth rate of manufacturing output, percent Source: Office for National Statistics.

Foreign direct investment, 2000-2010 Cumulative sum of annual FDI flows between 2000-2010 Source: OECD.

International spare capacity measures Percentage deviation from potential GDP Note: Global output gap for the years 2010 -12 based on IMF forecasts; OECD output gap for 2011-12 based on OECD forecasts. Source: IMF, OECD.

Expectations and credibility Monetary policy, the global economy and inflation Impact of monetary policy Cost of imports Exchange rate Domestic demand Expectations and credibility Global economy Demand UK inflation Pricing climate

Effective exchange rates – UK, US and Euro-Area January 2007 = 100; monthly averages Source: Bank for International Settlements.

Domestic demand growth, 2005-10 Percentage change on previous year Source: OECD.

Capacity utilisation in manufacturing Percentage balance of firms at or above capacity Note: The percentage balance of manufacturing firms reporting they are working at full capacity. Source: CBI Quarterly Industrial Trends survey.

CBI price expectations since 1990 Percentage balance of manufacturers expecting higher prices less those expecting lower prices Source: CBI Industrial Trends Survey.

The case for gradual interest rate rises Current monetary policy settings reflect exceptional conditions in late 2008 and early 2009 Growth has turned round at home and abroad Inflation, rather than deflation has been the problem Further global price shocks on the way Inflation expectations rising and wage growth picking up Credibility of inflation target and confidence in MPC risk being undermined Risks of delay - future shocks to confidence/recovery