On the one hand, the Bank of England is required set interest rates so as ‘to maintain price stability and subject to that to support the economic policy of HM Government, including its objectives for growth and employment’. On the other, the Government is required to specify what its economic objectives are, including what is meant by price stability. The remit of the Monetary Policy Committee (MPC) must be set out in writing at least annually and it must be published. The remit has always had important elements of flexibility. For example, while the MPC is directed to aim for the target ‘at all times’ and to treat deviations from target symmetrically, it is not expected to react mechanically. Instead, if inflation deviates from target by more than 1%, the Governor is required to write to the Chancellor explaining the circumstances and setting out what action the MPC considers necessary to return to target. No letter has been written so far, but only because circumstances have not warranted it. There is an explicit understanding that operational independence must be accompanied by transparency and clear accountability to Parliament and the general public as well as to Government. The Bank’s forecasts are published in the quarterly Inflation Report, the minutes of MPC meetings are published within two weeks, and the nine members of the MPC appear regularly in front of Parliamentary committees as well undertaking between them some 50-60 regional visits a year to different parts of the UK.
Rachel Lomax: Inflation targeting - achievement and challenges Speech by Ms Rachel Lomax,1 Deputy Governor of the Bank of England, to the Bristol Society at the University of the West of England, Bristol, 18 February 2004. *  *  *  Ladies and Gentlemen, it is a great pleasure to be here in Bristol tonight. Bristol and the Bank go back a long way. Our Agent in the South West, the late Michael Knight, was a founder member of this Society. And nearly two centuries ago - in 1827 to be exact - Bristol was one of the first branches that the bank established outside London. Not that it was plain sailing. The Bank’s first Agent in Bristol, Mr John May, resigned after only a few years complaining of the unhealthy situation of the branch premises, situated as they were next to the City Poor House and a pool of stagnant water, at risk of cholera and - this was the time of the great Reform Bill - riots and fire. By these standards, our present Agent, Kevin Butler, has no grounds for complaint. My subject tonight is a more recent episode in our economic history: the improvement in economic performance associated with the adoption of inflation targets just over a decade ago. I’ll look first at why this approach to monetary policy seems to work, and then consider what challenges remain for policy makers.