Just as price stability is conducive to growth, so too is an environment of “monetary stability” in which interest and exchange rates are sufficiently stable to act as effective allocative mechanisms. In our case, as inflation has settled at low levels, we have come to devote considerably more attention to the nature of the trade-offs we may face in our day-to-day monetary policy strategies.
While the redistributional and allocative consequences of higher energy costs cannot be ignored, the scope for supporting households and firms is likely to be much more limited than in the last two years. Additional room for manoeuvre may be gained by reducing other expenditure.