If the private sector continues to grow – in line with the latest business survey evidence – and headline inflation remains high, it is hard to see why private sector pay settlements should not return to their pre-recession average of around 3.5% and possibly move higher.9 Issue 4: Inflation expectations and credibility That brings me to my final key issue – the role of expectations and credibility in the framework for monetary policy. Chart 12 shows a diagram which I have used in a number of speeches now and which I believe sums up well the challenge that the MPC faces in trying to stabilise UK inflation in a potentially volatile global economy. The global economy affects inflation in the UK through the cost of imports, the impact of world demand on the UK economy and through the way in which international businesses perceive the pricing climate changing on global markets – which will have an impact on their pricing strategies here in the UK. All these factors can affect UK inflation – but monetary policy has three powerful counter-influences: the influence of monetary conditions on the exchange rate and the level of domestic demand, and the ability of the monetary authorities to anchor price expectations through their commitment to the inflation target or some other monetary anchor.
These mainly consisted of extraordinary budgetary items to reinforce their health systems and provide liquidity support to households and firms, including guarantees, loan servicing payment deferrals, capital injections, additional public spending and forgone revenue, including temporary tax cuts. Turning to monetary policy, nearly all of the region's central banks have cut interest rates to record lows. Further, they have provided liquidity in local currency and in dollars, conducted banking interventions and some of them have even established asset purchase programmes,6 which have reduced the volatility in longer-term interest rates and in exchange rates. 5  For a description of the pandemic transmission channels in the region, see Banco de España (2020), “Report on the Latin American economy. Second half of 2020”, Analytical Articles, Economic Bulletin, 4/2020. 6 For a description of the asset purchase programmes run by central banks in emerging economies, see Banco de España (2020), “Asset purchase programmes of Latin American central banks”, Box 1, “Report on the Latin American economy. Second half of 2020”, Analytical Articles, Economic Bulletin, 4/2020. 4  Likewise, the corresponding economic authorities adopted a set of macroprudential and supervisory measures to foster the flow of credit, provide liquidity to the banking system and mitigate the adverse impact of the crisis on financial institutions’ capital.7 All of these measures have helped to ensure that the main indicators of the most important Latin American banking systems for Spanish banks have not deteriorated significantly.