The reaction function approach is arguably more robust to uncertainty about the structure of the economy than alternatives that seek to characterise policy by the first-order conditions of the policymaker’s objective function, although that robustness comes at the cost of not being formally the ‘best’ rule for a given model structure. See for example Levin and Williams (2003). 16  BIS central bankers’ speeches  It has always been the case that, because the economy is subject to unforeseen disturbances, the precise path for Bank Rate cannot be preordained.24 But “data driven” means more in the post-crisis world. The economy’s performance will, over time, reduce some of the uncertainty about its supply side and underlying inflation dynamics. Although great uncertainties remain, we are arguably better informed about the dynamics of exchange rate pass through, the prospects for some recovery in productivity growth and the resilience of the UK financial system. Risks to the outlook and uncertainties about the economy are occupational hazards of monetary policy making. The MPC’s job is to assess them constantly and set policy accordingly. There will be no pre-commitments beyond an unwavering focus on conducting policy in a manner consistent with our remit. That means we’ll do the right thing at the right time on rates. Doing the right thing requires taking into account a powerful set of forces, part secular, cyclical, domestic, and global.
For example, a “core” measure that relied exclusively on inflation in the services sector would have run above 2% in the pre-crisis era, when overall inflation was around 2%, in light of low inflation rates in goods prices. A “core” measure with a higher weight on goods prices would have shown the opposite. 22  For example, although they are uncertain, estimates of the pass-through of exchange rate movements to CPI inflation suggest that, on average a 1% appreciation reduces consumer prices by around 0.3%. Those effects take time, though they are mostly complete in around three years – consistent with complete but gradual passthrough of exchange rate changes to consumer prices. That likely reflects, among other things, rigidities in retailers’ pricing decisions. See the box on page 28 of the November 2015 Inflation Report for further discussion.