Even though our inflation forecasts are in line with the target, but we act and communicate in a way that can make it unclear how important we consider the inflation target to be – and in the worst case do this on repeated occasions – economic agents will sooner or later start to doubt our intentions. If such doubt takes hold, inflation expectations in the economy may start to fall. Economic agents may start to expect lower inflation than 2 per cent even in the long term, and ultimately also begin to incorporate this into their economic decisions. In this case, a self-reinforcing process arises leading to average inflation “getting stuck” at too low a level. But would this really be so problematic? Yes, I think it would be. That I am such a committed advocate of the inflation target is not about me considering the 2-percent target to be “holy”, just for the sake of it. It is about it not only being important from an economic perspective that inflation does not rise too high, but also that it does not fall too low. I have often discussed the arguments for this, but they are worth repeating. There are above all two aspects that I think make it important to maintain confidence in the inflation target of 2 per cent and which indicate that the target should not be lower. One is that, when average inflation is too low, it becomes more difficult for wage formation to distribute the resources in the economy efficiently.
It is therefore my intention that, following a thorough and consistent review of firms’ applications, we make final decisions on all models for firms for which we are the home supervisor in early December, and communicate those decisions to firms simultaneously at that point. Firms that do not have an internal model will, of course, enter the regime on the standard formula. In conclusion, we will faithfully implement Solvency II here in the UK. We will be proportionate, and we will be robust in the pursuit of our objectives. And in doing this: •  we will not use Solvency II to increase capital requirements across the insurance sector;  •  we will not keep the ICAS regime alive; and  •  we will give firms plenty of time to adapt to the new regime. Thank you. 4  BIS central bankers’ speeches