The subsequent path is somewhat uneven as the VAT cut is reversed next January, but the broad picture is for inflation to continue to run well below the target in the medium term, as the downward pressure from the substantial margin of spare capacity outweighs the waning impact on import and consumer prices of the lower level of sterling. So the Monetary Policy Committee will probably need to take further action to return inflation to the target in the medium term. That is a discussion we will no doubt have at future meetings. Before finishing, I want briefly to reflect on what this crisis means for the UK’s macroeconomic policy framework. For 16 years, the inflation targeting framework worked pretty well, delivering steady growth and low and stable inflation. In particular, the United Kingdom managed to come through the Asia/LTCM crisis of 1997-8 and the aftermath of the dot-com bust in 2001-3 relatively unscathed. But plainly it hasn’t prevented things coming unstuck now. What has gone wrong? This recession is rather different from its three large post-war predecessors, each of which was associated with policy actions to curtail an inflationary boom that had got out of hand. On this occasion, the boom was not in the market for goods and services, as the data on growth, unemployment and inflation bear witness. Rather it was associated with a debtdriven boom in asset prices, including property. But the bust has not been confined to asset markets and has instead infected the real economy of businesses and jobs.
Starting from 1994, the Treasury’s annual use of short-term advances is to be reduced gradually over five years from 15 to 3 percent of each year’s incremental budget appropriations. By 1998, the Treasury will be entitled to short-term advances totalling not more than 3 percent of that year’s incremental budget appropriations over the previous year. In addition to that, the Treasury and the Central Bank have signed a seven-point protocol to cooperate in fighting inflation. The official aim of this accord is also to give the Central Bank more independence. So, an important development towards the full independence of the Central Bank has been initiated, as required in the Maastricht Treaty. However, we have been in the process of preparing a new Central Bank law in parallel with the same institutions in the EU. The work has already been done and we are ready to submit it to the government if and when the political environment is appropriate. On the other hand, in addition to the already installed electronic payments clearing system, the CB has signed a contract to develop and install a modern national securities settlement system. The new system will allow the Bank to increase the efficiency with which government securities can be traded on the capital markets and ensure that the payments system will match the standards of those in the EU and other western nations. The new system will also be capable of being connected to the BIS Review 105/1997  -3TARGET network.