Economic Stability and the Business Climate

Abstract

Since the adoption of inflation targeting in the United Kingdom, there has been greater stability at the level of the macroeconomy - stability in this context refers to the volatility of output growth. In this speech, Kate Barker, member of the Bank's Monetary Policy Committee, discusses preliminary work undertaken at the Bank which, in contrast, indicates that at the level of the individual firm volatility has tended to increase for real sales and profits over the same period. It is not clear what accounts for these divergent trends. But it is possible that, as markets have become more open to competition, firms look harder at how their competitors may react, and may be more cautious in their approach to wage and price-setting. This leads to greater variation in outcomes for firms but to a benign macro environment. This is good news for policymakers.

Looking at the period just since Bank independence in 1997, it is pointed out that improving terms of trade, a fall in real long-term interest rates, and a declining rate of equilibrium unemployment have all been factors which have supported a 'feel good' factor alongside low and stable inflation. These trends are now unlikely to continue. So the next few years may seem a little less favourable than the recent past, although still good compared to a longer historical perspective.