And I will frame my contribution in terms of the use the MPC has made of what has come to be known as the “monetary policy toolbox”: the range of policy tools that MPC has used so far, what tools are available to us now, and which ones we might decide to use in the near future. The idea of a range of monetary policy tools is itself quite a new one. For many years monetary policy makers used one tool, the policy rate, to achieve their goal – in the UK case, that meant Bank Rate. And the Bank used a small, focused set of central balance sheet operations to keep money market rates, and so rates in the wider economy, close to that policy rate. Two developments changed all that: first, the secular decline, over several decades, in the trend real interest rate; and second, the global financial crisis and the great recession that followed it. 1 The trend real rate – big R*, in central bankers’ jargon - has fallen over the past few decades across advanced economies. Figure 1, taken from the August 2018 Inflation Report, sets out the MPC’s view of what explains that fall. Much of it can be explained by structural factors such as an ageing global population, which have raised the demand for savings. Other structural factors, including a decline in trend productivity growth, have reduced businesses’ demand for capital.
HB: What needs to be changed? Trichet: We certainly do need change in Europe – fundamental change. Not only in the area of surveillance and monitoring of fiscal policy, but also as regards structural reform policies and competitiveness policies. HB: Examples? Trichet: We need to improve drastically everything: the quality of the diagnosis and recommendations by the Commission, much more stronger procedures – and where necessary automatic procedures and tools – to prevent ex ante bad policies, and much more effective sanctions ex post. I will make all these points with the greatest energy in the Van Rompuy Committee. HB: Will the measures adopted by the ECB now dampen growth in Europe? Trichet: No. It is a complete fallacy to say that fiscal soundness dampens growth. It is exactly the contrary. It is the absence of fiscal credibility which dampens growth. Medium term sound and credible fiscal policies are a major prerequisite for confidence. And confidence of the households, confidence of the entrepreneurs and confidence of the investors is what is indispensable for the recovery. HB: Did you ever think that you would have to take such difficult decisions as President of the ECB? Trichet: I have had to take difficult decisions throughout my career – including as President of the Paris Club in the 80’s and Chairman of European Monetary Policy Committee in the 90’s as well as Governor of the Banque de France.