It is as if their judgements were expected to be consistently instinctive rather than objectively based upon their individual, open-minded, assessment - reached after careful analysis - of the most recent information available at the particular time. As a result serious economic commentary seems - perhaps temporarily - to have ceded some ground to ornithomancy - which, as of course you know, is the ancient practice of divining the future by observing the behaviour of birds - especially their flight patterns! This I suspect contributed to the surprise reaction to last week’s further rise in interest rates - which proved once again that “Hell hath no fury like a wrong-footed financial commentator”! It should not have been such a great shock. In the Inflation Report which we published a month ago we set out the analysis as I have described it to you this evening, and we drew attention to the fact that the outlook for monetary policy remained finely balanced - as it has clearly been for some months. We drew attention also to the major uncertainties surrounding the central inflation projection. These uncertainties included both the level of the exchange rate and developments in the labour market. It was - as we explained in our press notice last Thursday - the subsequent “news” essentially on these fronts, and particularly the sharp acceleration in private sector earnings growth, that caused the Committee to conclude that the necessary slowdown in domestic demand growth had become more pressing.
It showed that there existed areas in which we needed to think further or maybe even revitalise old knowledge. Not least, it  6  BIS Review 68/2010  made it apparent that, while central banks had become more adept at handling normal shocks to demand and supply, there remained a great deal to be learned regarding the manner in which imbalances on the financial markets ought to be handled. So what consequences can we expect the crisis to have for central banks’ method of working in the future? Is there reason to supplement current monetary policy reasoning – and, if so, how? A large part of what I will address here today consists of matters that are currently the subject of intensive international discussion. The final result of these discussions remains to be seen. Nonetheless, let me think aloud on the manner in which central banks’ work may be affected and on the challenges we will face. Effects on potential output and growth? One challenge concerns attempting to assess the manner in which the crisis will affect the economy’s long-term production capacity or potential output. This is significant for several reasons. Firstly, the deviation between actual and potential output, the output gap, is a measure of the stability of the real economy. Secondly, the output gap can affect the manner in which inflation develops. If the production of an economy exceeds its long-term production capacity (that is to say, if the output gap is positive), this tends to exert upwards pressure on inflation.