In retrospect, my first two terms on the MPC were periods which now look like the small change of monetary policy – small changes in Bank Rate aimed at adjusting for relatively small anticipated deviations of inflation from target. As I suggested at the start, it may however also have been the period in which a large error was made in allowing the belief to become established that policymakers had solved the issue of economic instability. As Jean-Claude Trichet recently commented: “...remedial action has often been triggered as soon as the financial firestorm has threatened the stability of the economic system. But such action risks raising expectations that macroeconomic policy will always insure against tail risks, no matter how large.” 13 Even when policymakers have added robust macroprudential instruments to their armoury, it will be important to be clear that there will still be sources of macroeconomic instability. This may not be easy during any prolonged period without such a shock, unless policymakers are prepared to be a little less assiduous about fine tuning. More recently policy has certainly not felt like fine tuning. In this talk, I have tried to suggest some ways in which policy might be approached a little differently, but without moving away from the month-by-month decision-taking which has served the UK well. There is presently much uncertainty about the size of the output gap, partly as it is not easy to reconcile a large negative output gap with recent upward surprises on inflation.
Let me complement that with one for markets: “Adapt and survive”. But let me add the positive rider - “Those who survive will thrive”. What is the role of the authorities in this future I have described? It is, very simply, to provide as best we can the economic and regulatory environment in which financial markets can do their job - of allocating capital to where it can be most productively deployed - more effectively. On the economic front that means steady growth with low inflation. On the regulatory front it means a framework of rules that provide for the transparency that is essential for the proper assessment and management of risk and sets clear behavioural standards which do not unnecessarily distort business decisions but provide clear guidance to market participants - whether they are end-users or intermediaries - as to what is expected of them and what they can reasonably expect of others. The picture I have painted is one of challenge and change. The flip-side of course is great opportunity. In fact there has never been a time when the markets here in London did not face change and uncertainty. But there has never been a time either when you, we, all of us, did not rise to the challenge. I am sure we will all do so again - and I wish you all possible success. 3  BIS Review 15/2000