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.
As regulators, we obviously have a part to play in helping the finance industry adapt. We should strive to reduce uncertainties as much as possible. One source of uncertainty today is the regulatory framework. Nearly ten years after the crisis, our priority must be to stabilise the rules. The main elements of the Basel III package have already been approved in 2010–11 and have largely entered into force. But there are still ongoing discussions regarding the measurement of risk on bank balance sheets. The objective, as you know, is to reduce the unwarranted variability of results between banks and across jurisdictions. And as the German G20 reiterated last week, the completion of reforms must not result in a “significant increase in overall capital requirements”. We have not yet reached an agreement. Thanks to our mobilisation and that of our European partners, we have avoided a bad agreement. For the coming months then, our objective is to reach a good one. Another source of uncertainty is Brexit. With article 50 about to be triggered, we obviously cannot prejudge the outcome of the future negotiations. But it is essential to bear one principle in mind: in the single market, you cannot separate access and rules. In financial services in particular, you can hardly expect to have a European passport if you don’t accept the single market’s rules. Let us be clear: we are saddened by Brexit, and we are not the ones who have decided to have a so-called “clean Brexit".