If that had meant a deeper recession, deflation and an even longer-lasting malaise in the economy, then very few UK-based medium-term investors would have been better off as demand and activity would have dropped off further, credit risk crystallised and a range of credit investments went bad. Those with longer term investment horizons – such as everyone in this room should have – will appreciate that the best outcome for UK monetary policy is for it to be set at the right level to lay the foundations for a stable economy. In that regard, we should bear in mind that the economy will always be subject to unforeseen shocks which tend to push it away from stability for a period of time. The job of the MPC is to  3  With such a large change in the nominal exchange rate, one only needs to be slightly out in estimating the marginal impact to generate large errors in the total impact. 2  BIS central bankers’ speeches  react to those shocks by bringing inflation back to target and, subject to that primary objective, in a manner which helps sustain output and employment. As well as inflation back around target, we have also seen a resurgence in growth over the past year. It was difficult to explain the suddenness of the change in sentiment which accompanied the recovery during 2013 but growth in itself should not be regarded as surprising. It is the near stagnation from 2010–12 which was harder to understand.
The recognition of these different short-run trade-offs, depending on the forces driving inflation, lie right behind the specification of the Remit we have been given by the Government. The fact that inflation has now returned to target confirms to me that we were broadly correct in our underlying assessment that the factors pushing up on inflation would be temporary, although the near-term path for inflation hasn’t always been what we expected. It is very difficult to anticipate the precise trajectory of prices and we have certainly learned more about the dynamics of inflation during this difficult period: the effects of the 25% depreciation in the sterling effective exchange rate between mid-2007 and early 2009 were larger and longer-lasting than we anticipated for example3. But tightening policy in response would have been a major mistake: a tighter policy then and we could now be facing the threat of deflation and depression, rather than inflation around target and the prospect of real recovery. The MPC’s policy has been to keep short-term interest rates low, by setting Bank Rate at 0.5%, and to stimulate the economy through asset purchases and latterly through forward guidance. Although asset purchases work through several channels, I want to spend a little time on their contribution to depressing longer-term interest rates. Low interest rates – at all maturities – have been necessary to help stimulate spending and so help set the conditions for a recovery in the economy.