4  All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx  4  To provide stimulus, central banks have taken policy rates to the effective lower bound and beyond by using forward guidance, new lending facilities and asset purchase programmes. In parallel, monetary policy communications have been transformed. Committee decisions are now explained more fully, in a more timely and targeted way. Given greater supply uncertainty, more details are provided about the assumptions underpinning forecasts. And in the face of large downside tail risks, more facets of the reaction function are being spelt out. While there have been many innovations, given the time available today, I will focus on two: communications including forward guidance; and central bank facilities. Communications including forward guidance For both the euro area and UK, the past decade has been marked by increased transparency and more focused communications. The ECB has followed each monetary policy decision with a statement and press conference at each meeting since its creation in 1999 and these were supplemented a year later with macroeconomic projections. In 2015, it dropped the frequency of meetings from twelve to eight to allow for a fuller passage of time between decisions, and supplemented the statement with a fuller account of its monetary policy deliberations, published four weeks after policy announcements. Twenty years ago, the Bank of England was publishing minutes of its monthly policy meetings and quarterly economic forecasts in its Inflation Reports. It didn’t however always issue statements following decisions. Following the Warsh Report in 2015, we overhauled our communications.
Average MPC vote includes both decisions on Bank Rate and QE, with every extra £ of asset purchases (gilts and corporate bonds) treated as equivalent to a 25bp cut in Bank Rate (see Joyce, Tong and Woods, 2011). Six years ago, the MPC recognised that past should not be prologue. The MPC was pretty certain there was a large amount of slack, although it had questions over how much productive capacity had been destroyed following the crisis; how quickly productivity growth would recover; and whether labour supply would change in the wake of reforms and a heavy burden of household debt. Such uncertainties about supply meant that knowing what was happening to demand was no longer sufficient for gauging the appropriate policy response. That is why the Committee provided forward guidance that explicitly linked any potential change in interest rates to the unemployment rate – a clear and widely understood indicator of the degree of slack. The message the Committee gave UK households and businesses was simple: the MPC would not even think about tightening policy at least until the unemployment rate had fallen below 7%, consistent with the creation of around three quarter of a million jobs. What we – and others – learnt as the recovery progressed was that the UK economy had substantially more spare capacity than previously thought. The MPC could be patient.