RPI inflation has risen to 4.4%, the highest rate since December 1991. And RPIX inflation – the target which governed our decisions until December 2003 – has risen to 3.8%, which would have triggered a letter under the old target. In 1997, I suggested that “Given past experience of inflation volatility, it is likely, even allowing for the change in policy regime, that the MPC will have many opportunities to restore the lost art of letter writing to British life”. It is really very surprising that no opportunity has yet arisen. As I stressed back then, it is important to understand – and many commentators seem to misunderstand – that the inflation target is not a range of 1-3%, but a target of 2% at which the Monetary Policy Committee continually aims. So an inflation rate of 3.1% is simply a trigger for a public explanation of why inflation has risen above target and what the Committee proposes to do about it. Letter writing is a key part of the accountability provisions of the monetary policy framework created in 1997, and I would welcome the chance to demonstrate how the process is meant to work. The opportunity to write to the Chancellor did not arise last week. But since we are so close to the level that would trigger a letter, let me instead write a letter to you. Over the past year CPI inflation has risen by a percentage point, from around 2% to 3%.
I have been impressed by how they have focussed on products in which they can add value and exploit their comparative advantage – whether a company in Northern Ireland exporting wall heaters to the newly rich of Shanghai and Beijing, a manufacturer in the North-West exploiting a patent for paint which is resistant to very high temperatures, or a company in the Potteries passionate about the plates they make for the hotel and restaurant trade. And if you want a digger, why look further than a JCB? Proof that vehicle assembly in the West Midlands can be successful. All of them – as all of you – are working in a highly competitive environment. It is indeed much harder to run a business than to run a central bank. But seeing those companies at first hand has made me even more convinced that our duty is to ensure that you do not experience the macroeconomic instabilities of the past and that we keep inflation on track to meet our 2% target. Stability is in your interest just as much as mine. Speeches on monetary policy rarely whet the appetite for a good meal, and I apologise for that before the splendid dinner your Chamber is about to serve. But tonight has been an opportunity to share our analysis of the economic situation with you. I hope you will understand the reasons behind our decisions to raise interest rates over recent months, even if it goes against the grain to support them.