But whether they are appropriate or not is a subsidiary question, and it is one that is related to the political economy of how to ensure the transparency of policy, the accountability of those responsible for it, and the way in which households and firms form expectations of policy: monetary, fiscal or other. Since the political economy varies from one country to another, so will the appropriate method of achieving price stability in particular, and economic policy stability in general. The crucial and overriding point is that a market economy cannot flourish if policymakers behave in ways that lead private agents to expect future economic policies – be those future monetary, fiscal, or legal policies – to be subject to arbitrary or capricious changes. Of course, an expectation of a stable regime will rarely translate into stable outcomes, and it would be irresponsible of policymakers to let such a misconception take hold. A well designed set of institutions will lead to responses being predictable, but cannot guarantee that outcomes will be. And there is a pressing issue here. In the US, inflation has been both low and rather stable. Over the past decade it has varied between 1.0% and 3.8%, so we can with some justification say that inflation no longer “materially enter[s] into the decisions of households and firms.” In the UK inflation has, if anything, been even more stable. But this success carries a risk for the future.
For example it would mean people have direct access to the ultimate risk-free asset. In its extreme form, it could fundamentally and perhaps abruptly re-shape banking. However, were it to co-exist with the current banking model, it could exacerbate liquidity risk by lowering the frictions involved in running to central bank money. 11 These questions and others are why these topics are being examined as part of the Bank’s research agenda, with the prospect of a central bank digital currency for the UK, in my view, still some way off. We will work to make payments easier, and though cash may no longer be king it once was, its reign will endure for some time. The fourth way the Bank is enabling the FinTech transformation is by partnering with FinTech companies on projects of direct relevance to the Bank’s mission. I am announcing tonight that the Bank is launching a FinTech Accelerator to work in partnership with FinTech firms on challenges that we, as a central bank, uniquely face. The Accelerator will work with new technology firms to help us harness FinTech innovations for central banking. In return, it will offer firms the chance to demonstrate their solutions for real issues facing us as policymakers, together with the valuable ‘first client’ reference that comes with it. With time, the Accelerator will build a network of firms working in this space for the benefit of us and them alike. How will this help us?