Second, the Committee stands ready to make further asset purchases should the outlook warrant them. Just as with movements in Bank Rate in more normal times, a pause in monetary loosening does not necessarily mean that loosening has come to an end. It will all depend on how the outlook for inflation evolves. Looking further ahead, the Committee at some point will need to reduce the current exceptional degree of monetary stimulus. Some commentators have suggested that the MPC has been less forthcoming than other central banks in explaining its exit strategy. But to a large extent this reflects the fact that we have less to communicate. The Committee has two instruments through which it can withdraw the stimulus, raising Bank Rate and selling assets. Unlike some other central banks which need to create new instruments to drain excess reserves or alter the terms of existing facilities, the structure of the Bank’s operating framework means these two instruments can be used at any time, in any order. And the strategy guiding our policy decisions will be unchanged – monetary policy will continue to be determined by the outlook for inflation relative to target. The most difficult decision will be to decide the timing of the withdrawal, but that is always the case. The aftermath of the financial crisis posed many questions for the theory and practice of monetary policy.
It was vitally important that the Monetary Policy Committee was able to introduce a new policy instrument at the point at which Bank Rate reached its effective lower bound. This instrument had to be credible, both in terms of its economic impact and the willingness of the Committee to use the instrument in force. My own view is that the speed with which the asset purchase programme was introduced and the scale of the programme played an important role in reaffirming the MPC’s commitment to achieving the inflation target and reinforcing the belief in our ability to do so. 4  See, for example, Thomas (1997). 5  See Fisher (2010) for a more detailed discussion of these operations. 4  BIS Review 29/2010  Estimating the effects so far So what impact have our asset purchases had to date? That’s the two hundred billion pound question. Unfortunately, it is hard to provide a definitive answer. To be clear this is no different from our inability to assess precisely the impact of the reduction in Bank Rate from 5% to 0.5%. Or indeed of any macroeconomic policy measure. Without knowing what would have happened in the absence of a policy action, it is not possible to identify its incremental impact. But what is different is that this policy instrument is relatively untried and untested. So the demand to provide some insight into its impact is that much greater. This demand is quite understandable, but difficult to satisfy.