Inflation’s convergence in the run up to Stage Three has been checked, however, and recently the spread has even become wider. This is hardly surprising in itself, neither is it a major problem. The process known as catching up means that countries with a below-average level of prosperity initially will benefit from technological and organisational advances elsewhere and accordingly grow faster than the rich countries, which in turn can lead to higher inflation. Furthermore, countries with strong export-led growth can experience upward wage pressure in other sectors, too, leading ultimately to higher inflation. So there are reasons why growth rates as well as rates of inflation can diverge in a monetary union without this being unnatural or a problem for either the countries in question or the union as a whole. It seems fairly evident that elements of this kind of “more innocuous” inflation are around at present. The clearest example is Ireland, with catch-up effects and a number of years of exceptional productivity growth. But even there the picture is not unambiguous and when inflation now increases in a number of member states, questions arise about the formation of stabilisation policy. This is definitely not a problem that can be tackled with measures of monetary policy. The function of monetary policy is to maintain price stability in the union as a whole, a mandate that seems to be generally supported and understood. Neither is there any cause to criticise how monetary policy has been conducted in practice.
Despite this less-than-ideal starting position, the Bank ultimately embraced the provision of liquidity to the system over the course of the crisis, with the expressed aim of reducing the costs of disruption to critical financial services. This came about via an alphabet soup of schemes, including DWF, ECTR, ELTR, FLS, ILTR, and SLS. 3 Common to all was a  2  See Plenderleith (2012) for details of episodes of lender of last resort since 1973. 3  More information about these schemes is available on the Bank’s website: http://www.bankofengland.co.uk. BIS central bankers’ speeches  3  recognition that to achieve its aim, the Bank needed to provide liquidity against a wider range of collateral, to a wider range of counterparties, for a longer term. Two other innovations are noteworthy. •  First, in some circumstances the Bank lent in a currency other than sterling – a first for our liquidity insurance operations. 4  •  Second, the Bank acted as a market maker of last resort in the sterling corporate funding markets – making small targeted purchases and sales of commercial paper and corporate bonds. 5  Many of these changes were made in the heat of the crisis. And since the 2012 Winters and Plenderleith Reviews 6 much effort has been exerted in hardwiring them into our operating framework to make it clear to market participants how we would act in future.