2 -6 -5 -4 Output gap (%)  -3  -2  -1  0  1  Such circumstances have characterised the period in  1  the UK since the global financial crisis (Chart 2), 0  which entailed a large adjustment to the supply side of the economy, meaning a lower exchange rate,  -1  lower growth, and higher inflation. Source: Bank calculations. Chart 4: … as has the euro area  Chart 3: US has continued to experience predominantly demand shocks, not trade-off shocks, since the global financial crisis…  Great moderation  Inflation (%)  Great moderation  6  Inflation (%)  Financial crisis and after  Financial crisis and after  4.5 4  5  3.5 4  3 2.5  3  8 2 -4  2 -8  -6  -4  -2  0 1  -2  0  4  1.5  Output gap (%)  1  2  0  2  4 Output gap (%)  0.5 0  -1 -2 Source: Bureau of Economic Analysis, CBO and Bank calculations. The measure of inflation is the four-quarter change in the personal consumption expenditures (PCE) deflator. The output gap is calculated using the CBO estimate of potential output from its August 2016 Update to the Budget and Economic Outlook. -0.5 -1 Source: Eurostat, IMF and Bank calculations. The measure of inflation is the four-quarter change in the harmonised index of consumer prices (HICP).
First, since the global financial crisis, the UK economy has been subject to a series of major supply shocks, which, for reasons that I will explain, create a tension between short-term inflation and output stabilisation. And second, there has been a renewed recognition that, in extreme circumstances, the monetary authority may have to take into account financial stability considerations in setting monetary policy with potential consequences for the short-term path of inflation control. These are big decisions, decisions subject to considerable uncertainty, and decisions which entail potentially large welfare costs, arising from high unemployment and unevenly distributed costs of inflation. They deserve scrutiny to ensure that they are consistent with society’s preferences as expressed in statute and remit. 1. Monetary policy remit For most of the Bank’s history, an assessment of whether it was acting in a way consistent with society’s view of the public good could not be made. As former Governor Eddie George remarked, during the half century that followed its nationalisation in 1946 “the Bank operated under legislation which, remarkably, did not attempt to define our objectives or functions.” 7  They were, instead, “assumed to carry over from [the Bank’s] earlier long history.” In that regard, the Bank’s ‘constitution’ resembled that of the United Kingdom more broadly, comprising a rich history of law, principle and convention.