The costs of such failures were enormous, with prices rising by 750% in the twenty-five years to 1992, more than over the previous two hundred and fifty years. Unemployment was high and growth volatile. The inflation target rose from the ashes of the ERM debacle twenty five years ago this month, marking the point when price stability became the unambiguous objective of UK monetary policy. The new framework was a success, though only a partial one. That’s because, with interest rate decisions still made by the Chancellor, it wasn’t fully credible. Experience teaches that political control of monetary policy decisions suffers from time inconsistency, in which policymakers promise low inflation, then go for faster growth and ultimately achieve neither. Conversely, welfare can be improved if governments first choose the preferred rate of inflation and then delegate operational responsibility to the central bank to achieve it. 2  All speeches are available online at www.bankofengland.co.uk/speeches  2  The UK Framework for Monetary Independence So it was in 1997 when Gordon Brown boldly gave the Bank of England operational control for setting monetary policy. The Bank of England Act of 1998 clarified – for the first time in three centuries – the Bank’s responsibilities. 1  It gave a new independent body of the Bank, the MPC, a clear remit to achieve the inflation target over the medium term. The inflation target is symmetric (meaning we care as much about returning inflation to target from below as from above), and it applies at all times.
These are the best contributions the Bank of England can make to the good of the people of the United Kingdom. **************************** Ultimately, the prosperity of the UK will reflect not just the final Brexit arrangements but also the government’s fiscal and structural policies. The first speaker at this conference is the best placed to address these topics. It could, however, have been very different. As some of you may know, the Prime Minister began her career as a new graduate at the Bank before leaving after six years to pursue other interests – ultimately politics. Whilst at the Bank, the Prime Minister worked in the Economic Intelligence Department – then the cutting edge of our activities. During her time she accomplished great things and was destined for much more. Just imagine what could have become of your career, Prime Minister, if you had stayed at the Bank: you could have been in Fishmongers Hall…  5  All speeches are available online at www.bankofengland.co.uk/speeches  5  Instead you came here by a road less travelled. Theresa May was elected as MP for Maidenhead in 1997, just as the Bank was getting to grips with its newfound monetary policy independence. She held a number of positions in the shadow cabinets of a string of opposition leaders and served as the Chair of the Conservative Party. After the formation of the coalition government in 2010, she would become the longestserving Home Secretary in over 60 years.