I was able to point to the preceding four years - during which inflation had averaged just under 3¼%, compared with almost 10% over the previous 20 years. I was able, too, to point to sixteen consecutive quarters of positive economic growth. And I was able to point to a continuing, relatively steady fall in unemployment from its peak - in terms of the claimant count measure - of almost 10% in 1993. Then I held out to you the prospect of continuing stability - with low inflation and sustained economic growth - as far ahead as I could see. You didn't believe a word of it! You listened - very courteously, as I would expect from the members of your very professional association - but you listened with a good deal of scepticism, which, I confess, I could perfectly well understand. As I left that evening, one of your members said to me "I do hope you're right, Eddie, but we've heard it all before. We'll believe it when we see it!" I suspect he spoke for most of the rest of you. Well, tonight I can tell you that inflation - on the Government's target measure - has averaged just 2.5% over the past 10 years. We have now had 42 consecutive quarters of positive economic growth which is much the longest period of continuous growth since quarterly data became available in 1955.
The first is that central banks use their balance sheets not, like commercial banks, to generate economic returns for their shareholders, but to deliver the policy goals of monetary and financial stability. That may sound innocent enough: dull even. But that would be misleading – because  2  All speeches are available online at www.bankofengland.co.uk/speeches  2  maintaining stability means central banks must be prepared to act like financial firefighters – rushing into burning buildings (taking on certain types of financial risk) when everyone else is rushing out. That dynamic is clearest when central banks act as lenders of last resort: stepping in to provide temporary liquidity (to individual firms, or the market as a whole) when private liquidity providers take fright. They are uniquely able to do this because their ability to create fiat money means they face no liquidity risk in their own currencies of issue. Of course, central bankers go to great lengths to limit the other forms of risk they take on in such circumstances: lending only to institutions assessed as solvent and viable; taking high-quality collateral, with conservative haircuts; charging suitably penal interest rates; and typically lending only for limited periods. But they can still find themselves lending, sometimes in large size, when everyone else prefers not to, in order to limit the financial instability that would be caused by wider contagion. That inversion of the normal definition of risk tolerance – illustrated schematically in Chart 1 – is strike one against the risk professional’s standard operating manual.