22  All speeches are available online at www.bankofengland.co.uk/speeches  22  Chart A: Divine coincidence has continued to reign in the euro area and US post-crisis but not the UK A1) UK Great moderation  Inflation (%)  6  Financial crisis and after 4  Inflationary, with trade-off  Inflationary, no trade-off  2 -6  -5  -4  -3  -2  -1  0  1  2 3 4 Excess demand (%)  0 Disinflationary, no trade-off  Disinflationary, with trade-off -2  Sources: ONS and Bank calculations. A2) US Great moderation  6  Financial crisis and after  5  Inflation (%)  4 3 2 -8  -7  -6  -5  -4  -3  -2  -1  0 1  1  2  3  4  Excess demand (%)  0 -1 -2 Sources: Bureau of Economic Analysis, CBO and Bank calculations. Notes: 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. 23  All speeches are available online at www.bankofengland.co.uk/speeches  23  A3) Euro-area Inflation (%)  5  Great moderation Financial crisis and after  4 3 8 2 -4  -3  -2  -1  0  1  1  2  3 4 Excess demand (%)  0 -1 Sources: Eurostat, IMF and Bank calculations.
This is particularly important during large structural or regime shifts when uncertainty is high. In the wake of financial crises or advance of wholesale changes to trading relationships, people’s expectations for monetary policy can understandably diverge from its most likely path to the detriment of the economy’s performance. Guidance is most useful at such turning points. The views of economists and financial market participants are, of course, central to the transmission mechanism from Bank Rate, set by the MPC, to the various interest rates facing households and businesses and to asset prices more generally. Guidance can reinforce the transmission mechanism by reducing unnecessary uncertainty – not eliminating 3  all uncertainty. It is not the same as guaranteeing the future stance of monetary policy. Indeed, market participants can be expected to pay the closest attention to any explicit conditionalities around guidance and should usually be the first to update their expectations of policy as the outlook for the economy changes. Finally, guidance should be seen in the context of a series of MPC initiatives to increase transparency. In recent years, the MPC has made major structural changes to our communications ranging from publishing statements each time we meet to the simultaneous release of Minutes, Inflation Reports and Monetary Policy Summaries on Super Thursdays to the provision of the detailed assumptions underlying our projections. And last year, we introduced layered communications, with simpler, more accessible language and graphics to reach the broadest possible audience.