Just focusing on the international aspects, let me mention two points: first, only a handful of the thousands of banking institutions in the EU can be considered as truly panEuropean, even though these institutions make up a significant part of the banking market. In the same vein, a significant proportion of banks in a number of the new EU member states are foreignowned. Clearly, pan-European institutions are key to the EU’s position in the global system, and we must do everything we can to ensure they can play their role. But we also need to be careful that any measures we take in the interests of promoting greater efficiency for international institutions do not impose undue expense on smaller institutions, and we must take a perspective that is acceptable for both home and host supervisors. My third point is linked to this, and concerns the need to observe the principle of subsidiarity, a key tenet of the EU which says that action should only be taken at EU level where national or local action cannot have the desired effect. This principle is particularly relevant given the continued diversity of the EU banking industry and consumers. Supervision is best conducted close to the markets and institutions. Last but not least, I believe we need an approach which is realistic in the short to medium term.
True, headline inflation rose initially in many countries, especially the US, where it ticked up to nearly 5%, before falling sharply to less than 1.5% when oil prices fell this autumn. But central banks have been on the alert for any signs that higher oil prices would feed into higher wages, and so trigger an inflationary spiral. And so far wage growth has remained moderate in all developed countries, including the UK. Monetary policy Inflation has remained firmly under control despite a doubling in the price of oil. This, to my mind, is striking evidence of a sea change in policy since the 1970s. But how far was the Great Stability due to good policy, as opposed to globalisation or plain good luck? This broader question is probably unanswerable, but a couple of points are worth making. First, there is no doubt that, in the medium term, the actual inflation rate is determined by the Bank of England. Our decisions about interest rates – the price of money – determine the amount of total money spending in the economy. The rate of inflation reflects the difference between this spending and what the economy is capable of producing – total supply. The faster money spending grows relative to supply, the higher inflation will be. In that sense low inflation reflects policy, not luck. But external conditions may make it more or less easy to keep inflation low and stable.