That uncertainty maps into differing views as to exactly how accommodative monetary policy needs to be. On the one hand, there is a risk that the strength and durability of the recovery may disappoint. Our economy still faces considerable headwinds, especially within the household sector, where real incomes have been squeezed and many families may not yet have adjusted fully to the implications of the substantial fiscal consolidation now in train. On the other hand – as I’ve discussed – there is a risk that inflation may remain higher for longer than currently expected. Either because global price pressures continue to add to domestic inflation or because the persistent period of above target inflation starts to become ingrained in wage and price setting behaviour. It is still too early to reach any firm conclusions, but it seems likely that the terrible events in Japan and the political upheaval in the Middle East and North Africa will add to both of these risks. The huge disruption in Japan and the uncertainty associated with events in Libya are likely to dampen global demand, at least in the short run. But the accompanying increases in energy prices are likely to add to domestic inflation. At the MPC meeting two weeks ago I voted to raise Bank Rate to 0.75%. Even with this increase in rates, the stance of monetary policy would remain highly stimulatory. Bank Rate would still be close to an historic low and the stimulus from our programme of quantitative easing would be unaffected.
Yes, it is perfectly possible to explain why inflation has been so high for so long. And yes, there are good reasons why monetary policy did not try to keep inflation closer to target during this period. But just like the Judge looking down on me earlier, to some people, at some point, this may just start to sound like a series of excuses. This risk is heightened by the fact that the MPC has consistently under-predicted inflation during this period. It is much easier to be wise after the event. For many people, the one thing about inflation they know with certainty is by how much their cost of living has increased in recent years. And if they take any signal from that about the path of future inflation, this could have significant implications. Discussions of MPC credibility are often framed in terms of a set of binary arguments. Has the MPC lost its credibility or not? Are inflation expectations anchored or de-anchored? This approach encourages a focus on measures of medium-term inflation expectations. The rate of inflation expected over the next year or so may consistently move around since the MPC does not attempt to bring inflation back to target over very short time horizons. But this  10  In the extreme, the law of one price (LOOP) suggests that, in the absence of transport costs and trade barriers, the price of a given commodity will be the same all over the world.