So had you told me then that 40 years later inflation would be around 1% having hovered around ½% for two years, that Bank Rate would be ¼%, having been stuck at ½% for eight years, I might well have replied that this was as likely as my being invited back here in 2016, to give a speech on economics. (I might also have looked to see what you had been drinking or perhaps smoking.) There are perhaps two lessons in this. The first is that life and the economy never quite turn out as you forecast – in the longer term at least. The second is that in life and in economics you should never stop learning. I want to talk today about some of the possible reasons why Bank Rate is at ¼% and has been stuck at what appears, by reference to history, to be exceptionally low levels in the UK and in other advanced economies. And why long-term interest rates are similarly low. In 1976, you would have had to pay 11% to borrow for a year whereas the long-term rate was 16%. Today, the equivalent figures are ¼% and 2½%. 1  Some of the difference, of course, is inflation and the inflation expectations I and everyone else had back in 1976. Bringing inflation under control in the UK in the 1990s and anchoring inflation expectations at around 2% clearly led to a material drop in nominal interest rates and a drop in the entire nominal yield curve.
But while central banks need to be mindful of the possible side-effects of their policies, I would caution against requiring them to make more granular distributional judgments. Low and stable inflation and smoothing output volatility are public goods that benefit all; technocratic central bankers should use the tools available to them to achieve that public good and avoid as far as possible taking views on distribution. Distributional considerations and decisions should remain the province of elected authorities that have many instruments to address these issues. 9  All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx  9  I have discussed some of the policy implications of a low natural rate for central banks generally. In the UK, of course, Bank policy is now focused on assessing and, where necessary addressing, the implications for the economy over our policy horizon – the next two to three years – of the UK’s forthcoming exit from the European Union. I don’t need to say too much about this today. The minutes of the MPC’s November meeting and the November Inflation Report give a detailed picture about the Committee’s current forecast and policy stance to which I fully subscribe. But there is one point that is relevant to the analysis I have just laid out on the natural rate. As I said earlier, the policy rate may need to depart from the natural rate if the policymaker is faced with a shock that creates a tradeoff – for example between bringing inflation to target and smoothing output volatility.