INFLATION REPORT PRESS CONFERENCE …

                    INFLATION REPORT PRESS CONFERENCE
                               Wednesday 13 August 2008
                           Opening Remarks by the Governor




It may still ­ just ­ be summer, but there is a feeling of chill in the economic air. The
British economy is going through a difficult and painful adjustment ­ to higher energy
and commodity prices, and in banking, credit and housing markets. This adjustment to
our economy cannot be avoided. And, as a result, inflation is rising and growth is
slowing.


Rising food and energy prices have pushed up CPI inflation to 4.4% in July. Recent
announcements of rises in retail gas and electricity prices mean that inflation is likely to
rise further this year and to peak at around 5% in the coming months.


Increases in food and energy bills will intensify the squeeze on real take-home pay,
which, for many households, is unlikely to grow this year. These are circumstances in
which both consumer spending and house prices are likely to weaken together.


In addition, the continued adjustment of banks' balance sheets has resulted in a monetary
squeeze and tighter credit conditions, as shown by the sharp contraction of underlying
broad money and credit growth. The impact of this is very clear in residential and
commercial property markets where activity has slowed as prices have fallen. Indicators
of housing investment point to a substantial slowdown. And surveys suggest that
companies have scaled back their plans for capital investment.


The Committee's latest projection for GDP growth is shown in Chart 1 (GREEN
CHART) on page 6 of today's Report. The projection is based on the assumption that
Bank Rate moves in line with market expectations, which are for Bank Rate to be roughly
constant over the forecast period. The central projection is for output to be broadly flat
over the next year, so that four-quarter growth slows sharply in the near term. That is
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markedly lower than the projection in May, reflecting a weaker prospect for both
consumer and investment spending. But further ahead, as food and domestic energy
prices stabilise, the growth rate of real take home pay should recover. And that, together
with some easing in credit supply conditions and a pickup in exports following the fall in
sterling's effective exchange rate, should support a recovery in output. Nevertheless, the
possibility of a more prolonged adjustment in the financial sector means that, in the
Committee's judgement, the balance of risks around this central projection is on the
downside.


The Committee's latest projection for CPI inflation is shown in chart 2 (RED CHART)
on page 8 of the Report, again on the assumption that Bank Rate follows the path implied
by market yields. In the central projection, higher prices for domestic energy, food and
imports push inflation further above the target this year. These price increases will
continue to enter the measure of CPI inflation for 12 months, so inflation is likely to
remain markedly above the target until well into next year. But the impact of these
increases in commodity prices will diminish during 2009. They cannot by themselves
generate sustained inflation unless other prices begin to rise at a faster rate. And it is the
task of the MPC to ensure that they do not. So the current period of above-target
inflation, although very marked, will be temporary and inflation will return to the 2%
target.


To deliver that, the MPC must judge the appropriate stance of monetary policy. The
near-term outlook for inflation has deteriorated since May, reflecting the news about food
and energy prices. The Committee judges that a more pronounced slowdown in activity
is likely to be necessary to contain wage and price pressures and ensure inflation
expectations are anchored in the medium term. In the central projection, the slowdown
opens up a sufficient margin of spare capacity for inflation to fall back. And, towards the
end of the forecast period, it falls a little below the 2% target. But there are serious
upside risks around that central projection, which stem from the possible impact of
continuing high inflation in the near term on pay growth and on inflation expectations.
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The Monetary Policy Committee continues to face a balancing act between these upside
risks and the downside risk that a sharper or more prolonged slowdown could pull
inflation well below the target in the medium term. It was in the light of these risks that
the Committee judged at its meeting last week that, to return inflation to the target, it was
appropriate to maintain Bank Rate at 5%.


The adjustment of the UK economy to higher commodity prices and a more realistic
pricing of credit will be painful. The next year will be a difficult one, with inflation high
and output broadly flat. But with monetary policy focused on its task of bringing
inflation back to the target, we will come through the adjustment. And we will return, if
not to the nice decade, then at least to one that, as central bankers say, is not so bad.