The objective has been the same for both the ECB and the Bank of England – to clarify our reaction function in a highly uncertain world. In a perfect world, guidance would be redundant. People would know how the Committee intends to set rates over the future and how those intentions would adjust to economic developments in all eventualities – the so-called reaction function. But the world is complex and people (outside this audience) don’t have endless time to devote to understanding monetary policy. In practice, therefore, guidance can be useful in providing people with information about how the Committee sets policy and, over time, in improving the understanding of how monetary policy will adjust to news. This can make monetary policy more effective by reducing unwarranted volatility in interest rate expectations and the extent to which the central bank has to move the policy rate to meet the inflation target. The more those expectations are aligned with the policy path necessary to achieve the inflation target, the higher the probability that the policy objective will be achieved. The ECB’s experience provides a classic example. The ECB’s use of forward guidance has evolved over time with the first use in 2013. The previous year President Draghi had skilfully given assurance that the ECB would do “whatever it takes to preserve the euro”5 and the Governing Council followed through with a program of Outright Monetary Transactions which restored sovereign bond spreads to more sustainable levels.
13  All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx  13  Chart 9: Pass through of ECB rate cuts to lending and deposit rates facilitated by TLTRO TLTRO I  TLTRO II  Per cent 5 4 3 2 1 0 -1  2010  2011  2012  2013  Household deposits EONIA ECB main refinancing rate  2014  2015  2016  2017  2018  2019  Loans ECB lending rate ECB deposit facility rate  Source: ECB. To sum up on liquidity and lending facilities, reforms over the crisis leave behind a much more comprehensive backstop to dysfunction in funding markets. Liquidity is available more freely, against a wider range of collateral and in all major currencies. Moreover, through careful calibration targeted lending schemes can lower the effective lower bound on interest rates, unlocking more stimulus. ----------------------------------------------------To return to where I started, the past ten years have spurred tremendous advances in the conduct of monetary policy. In this as in so many other respects, Europe has a rich past. And in part because of that past, it now has the possibility of a bright future. For a perspective on the challenges faced by central banks today I will hand over to Stan Fischer. 14  All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx  14