Some inflation targeting central banks – Norway, New Zealand and Sweden – are now publishing charts which show how they expect to change policy rates to achieve their targets 6 . Should the MPC follow this trend? If you follow press reports of our regular Inflation Report forecasts, you might be forgiven for thinking we already have. But actually no: our forecasts take market expectations for interest rates as their starting point, and we leave commentators to draw their own inferences. We have maintained the position that we do not give hints about future interest rate changes. Naturally we are looking closely at what happens elsewhere and we will want to learn from their experience – though of course, since the MPC is not a consensual body, it would be a significant complication to get it to agree an explicit path for interest rates. 6  In addition, the Bank of Canada now includes text in its monetary policy report which indicates whether or not rates will have to change from their current level to meet the inflation target. BIS Review 20/2007  5  Have we become prisoners of our past success? Let me come, finally, to the biggest, and most difficult of the issues I want to raise tonight – namely the extent to which the stability of the past decade has conditioned expectations of what the MPC can and should do, in ways which may be both helpful and unhelpful to its ability to do its job.
Our monetary policy framework can only offer flexibility as long as it remains credible. But our credibility needs to reflect reality. It is important that the unprecedented stability of the past decade does not lead people to believe that central banks can walk on water. They can’t. When that becomes clear – as at some stage it will – I see some risk that people will be excessively disillusioned. So let me end by being very clear about what I regard as reality. The MPC cannot keep inflation exactly on target, at all times and in all circumstances. Large price shocks will sometimes drive us away from target, and we need to be able use our judgement in deciding how to react. But we can and will keep inflation close to target on average. Short run deviations from the target should not leave anyone in any doubt about that. Conclusions The stability of the period since 1992 has been almost as unexpected as the falling of the Berlin Wall, and every bit as welcome. It remains something of a puzzle and we cannot assume it will continue indefinitely. We do not know quite how big a part the MPC has played in achieving this outcome. But it has certainly been shaped by it. Success – however earned – has its price. It may have bred expectations of the MPC and what monetary policy can deliver which are frankly unrealistic – and unsustainable in the longer term.