This turnaround in the economy has prompted an active debate about when the Bank’s monetary policy stance should be shifted from back foot to front – in other words, whether and when UK interest rates might rise. Market expectations of future interest rates have already adjusted since the economy began growing. In January 2013, the first rise in UK interest rates was expected in the third quarter of 2015. Now, it is expected by the end of this year. This prospect has sent shivers down some spines. But some context is important here. When the first rate rise does come, it will be because the economy has recovered sufficiently to thrive on smaller doses of monetary medicine. A normalisation of interest rates would signal the economy having returned to the hospital ward, after six years in intensive care. The economy would be switching channels, from ER to Casualty. That is something to welcome, not fear. At the same time, the Bank’s policy guidance was introduced in August last year in part to prevent interest rate expectations getting ahead of themselves and derailing recovery. From our survey evidence, it appears that businesses listened and took heed. Investment rose 8.5% during 2013. This has meant the UK’s recovery has not just been healthy but reasonably balanced, with both households and companies contributing. Today’s uncertainties None of this leaves the job of judging the future path of monetary policy an easy one.
Even for the natural sciences, dealing with physical constants and fixed laws of motion, the voyage of discovery can sometimes be a lengthy one. It took a century before estimates of the speed of light had converged to its true value. For much of this period, not only were best-estimates biased but the estimated confidence intervals around them often did not encompass the true value.6 Modelling complex, adaptive, socio-economic systems would make these estimation problems pale by significance. It is for these reasons that the Bank is also investing in its research capacity. For example, in our quarterly Inflation Report the Bank now shows alternative scenarios for inflation and output under different assumptions about how the world works. Alongside this, the Bank is putting greater effort into developing a pluralist set of approaches to model-building, drawing on other disciplines. Operating in the corridor In time, these investments in data and research will narrow the corridor of uncertainty. But for now, the key public policy question is what to do when operating in it? Rocket-scientists, of the real rather than metaphorical kind, have a clear answer to this question: avoid really bad outcomes.7 This is sometimes called a “minimax” strategy – the aim being to minimise the chances of the maximum possible loss. It is the policymakers’ equivalent of the Hippocratic oath – “do no harm”. So what, then, are these avoidable-at-all-cost scenarios? Let me consider three from a potentially long list.