Paul Tucker considers four aspects of the current conjuncture that will be central to monetary policy judgements over the coming months. First, he discusses the effects of household and bank balance sheet repair on aggregate demand, which pose a downside risk to the outlook for activity. Second, he considers how supply capacity has been affected by the recession. He states: "There are a number of reasons for thinking that the 'effective supply' capacity of the economy has been depleted temporarily due to the shock to credit supply and confidence. How much, and how temporary, are major uncertainties... If demand recovers robustly, firms are likely to bring some capacity back on line. If, on the other hand, demand proves anaemic, then suspended-capacity is more likely to be permanently scrapped". A path of stronger demand is preferable provided it is consistent with the inflation target. He says: “In aggressively stimulating demand in order to absorb slack, we aim to keep inflation in line with the target over the medium term and also to reduce the extent to which the economy’s productive capacity is wasted."
Published on
23 February 2010
Press release