The rapid expansion in activity in these economies has inevitably put pressure on the global price of energy and other raw materials, whose supply is relatively fixed at least in the short run. That is showing up in rising inflation world wide (Chart 5). So is it right to conclude, as some have, that the path of inflation is determined abroad? Certainly commodity prices have an effect in the short run. But it is domestic monetary policy – the decisions that the Monetary Policy Committee take each month, together with the overarching framework that defines our target – that determines the path UK inflation in the medium-run. The MPC will continue to assess the balance between the risks of higher inflation from the commodity cost shock and the downside risks to output (and to inflation in the medium term) from the credit crunch. But I can assure you that we will do whatever it takes to bring inflation back to target in the medium term.
One of the main motivations for this rapid research effort is the swiftly decreasing use of cash. Just some two per cent of the money supply is now created directly by the central bank in Sweden, for instance. But even the avant-garde Swedes consider the e-krona a complement of cash, not a fully-fledged substitute. The potential advantages of distributed ledger technology and central bank digital currency are the following: more efficient payment systems, direct and more efficient conduct of monetary policy (perhaps even practically enabling helicopter drop of money) and, if implemented on a sufficiently large scale, an end to the need to run costly deposit insurance schemes. But will central bank digital currency become a complete alternative to cash one day? I’m not sure. Many questions remain: anonymity, susceptibility to cybercrime and IT issues. But above all those, a key issue arises: the problem of competition. Will the central bank change into a direct competitor to commercial banks? Will it serve as a “bank of last resort” for all deposits in bad times? Should it also provide credit to the real economy? Might it become a real monobank, like the ones we saw a few decades ago in former socialist countries? What would the entire money-creation process look like? These questions are too important to rush around. So far it seems to me like social engineering to talk about abolishing cash fully and issuing digital currency instead.