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

2. 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

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

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

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

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

7. 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

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

9. 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

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

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

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

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

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

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

16. 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.

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

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

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

20. 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

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

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

23. 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.

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

25. 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