That, in turn, would have provided some offset to the global inflationary pressures we have been experiencing over the past year. Instead, as Chart 5 shows, sterling has remained relatively weak, both against the full trade-weighted basket of the currencies of our trading partners, and particularly against the euro – which is the most important currency for UK trade, with the euro area accounting for around half of our total exports and close to half of total UK imports. Chart 5 Sterling depreciation since 2007 Rebased to 100 in January 2005 110 105 100 95 90 Euro-Sterling exchange rate  85  Sterling EER *  80  Average EER *, 97-07  75 70  2005  2006  2007  2008  2009  2010  2011  *: Effective exchange rate Source: Thompson Datastream and Bank for International Settlements  This weakness of sterling is one of the key reasons why UK inflation has been much higher than our peer group of European economies. As Chart 6 shows, the differential between inflation in the euro area and the UK is closely associated with the relative strength and weakness of the sterling/euro exchange rate. And there are good reasons for this. While the  BIS central bankers’ speeches  7  UK has an independent monetary policy, it is a member of the Single European Market which covers all European Union economies.
But the longer this process of accommodation goes on, the greater the risk that it becomes ingrained in expectations of relatively high future inflation and then credibility needs to be re-established with more abrupt interest rate changes and tighter policies in the future. It may be that indicators of an upward drift in inflation expectations are only flashing amber at present. But if the MPC waits until they are flashing red, and if other pressures continue to push up UK inflation in the meantime, the Committee could face a very difficult situation later this year or next. A well-conducted monetary policy should aim to move policy in anticipation of events and in a smooth and orderly way if possible. And as I prepare to leave the Committee at the end of next month, I do worry that the MPC’s credibility and commitment to the inflation target may already have been eroded by not adjusting policy settings soon enough – as the challenge for monetary policy has shifted from preventing deflation to curbing inflation and from halting recession to managing the recovery. Concluding remarks I started studying economics in the mid-1970s and my career as a working economist began in the mid-1980s. Throughout this time as a student and practitioner of economic analysis, we have seen UK monetary frameworks come and go, generally in the midst of an economic crisis. Since the Bretton Woods system of exchange rates collapsed about 40 years ago, the UK struggled to sustain a stable monetary policy framework for any substantial period.