Analogously, in significant degree financial stability is about safeguarding the stability of private money (deposits held by households and firms with the banking system) relative to central bank money. Depositors with banks have to be confident that they can exchange their deposits at face value for our money – our notes; or that they can smoothly transfer their deposits to other banks where they could be confident of that. Those two formulations amount to much the same thing, as transfers between banks are settled across our books in central bank money, the economy’s ultimate settlement asset. 5 At the level of the system, we need an “exchange rate” of unity between private money and central bank money. And we need wholesale funders of banks to be confident of that too. Absent that stability and confidence, the payments system and credit creation become severely disrupted, with big social costs. Of course, banks are not the only lenders in our economies. The current crisis owes a lot to the non-bank financial sector – funds, conduits, SIVs, securities dealers, and so on. But the excessive leverage and maturity transformation in the shadow banking system was in general predicated on the plentiful availability of credit on too-easy terms from the  maintenance period. For more details see paragraphs 74-81 of “The Framework for the Bank of England’s Operations in the Sterling Money Markets (the ‘Red Book’)”, Bank of England. 4  Ibid., paragraph 166.
Success in explaining the objectives of monetary policy, building the constituency for low inflation, and setting policy in order to meet the inflation target, are all key parts of the role of the Monetary Policy Committee. But the MPC cannot fine-tune the economy quarter by quarter. Its contribution to stability is to meet the symmetric inflation target of 2½%, looking beyond the immediate short-term fluctuations in monthly inflation rates. The Committee will have to watch carefully developments in the economy as they unfold, and be ready to act promptly in either direction. There will always be unpredictable events to which the MPC will need to respond. What is essential for monetary policy is the transparent framework for meeting the inflation target in the medium term, and, in so doing, helping to anchor inflation expectations as close as possible to the 2½% target. At the beginning of next month the MPC will meet for the 50th time. Reaching our half-century has not been without incident. No doubt there will be more surprises on the way to our century. But the symmetric and transparent inflation target provides the best defence against unexpected events. 4  BIS Review 58/2001