I thank staff for a very good and detailed report which reflects a productive mission. My authorities agree with much of the analysis and advice. However, they caution against setting a timetable for potential future fiscal policy actions. The uncertainty of the policy environment, the risks attached to discretionary fiscal easing and the need to calibrate any response to the circumstances – as stressed in the 2011 staff report – means any such timetable is unlikely to prove a useful guide to policy.
The UK is estimated to have contracted by 0.3 per cent in each of the last two quarters, meaning that growth over the past 18 months has been broadly flat. This largely reflects the impact of external factors, including the earlier rise in commodity price-driven inflation that hit real incomes and the ongoing euro-area debt crisis, which continues to undermine confidence and investment. Despite these difficult conditions, in the three months to April unemployment fell by 51,000 to 8.2 per cent and 166,000 new jobs were created.
Growth is expected to remain uneven and choppy through the rest of 2012 as public holidays and the Olympic Games have an impact on output, but the central case is still for a gradual recovery. In March the independent Office for Budget Responsibility (OBR) forecast subdued but positive growth of 0.8 per cent for 2012, 2.0 per cent in 2013 and then 2.7 per cent in 2014 as the recovery gains traction. A rebalancing from consumption and government expenditure to net exports and investment was still expected.
CPI inflation fell to 2.8 per cent in May from the peak of 5.2 per cent in September 2011 as the effects of the earlier rise in energy prices and VAT fell away, making space for monetary policy action. Against the background of continuing tight credit conditions, fiscal consolidation and increased drag from the heightened tensions within the euro area, the MPC judged that, without additional monetary stimulus, inflation was more likely than not to undershoot the 2 per cent target in the medium term.
My authorities agree with staff that the exceptional economic environment warrants a supportive macroeconomic policy stance. A number of steps have already been taken to achieve this, consistent with the Government’s well-established economic strategy based on: fiscal consolidation; monetary activism; financial sector reform; and growth-friendly microeconomic reform.