To achieve the 2% inflation target over the medium term but at the cost of an avoidable depletion of the economy’s supply capacity would not be congruent with the MPC’s Remit, which includes supporting growth and employment in so far as that is consistent with the overriding goal of price stability. I was glad that the “effective supply” way of thinking about this was reflected in our latest Inflation Report. But I would readily concede that we must not lose sight of the potential “speed limit” effects that featured in our November Report. Given the need for some rebalancing in the pattern of demand and activity, and the likely lags in firms bringing even suspended capacity back on-line, bottlenecks are a distinct possibility. We will need to be especially alert to messages from the Bank’s Agents, to survey evidence, and to data on productivity, wages and prices for any sign of inflationary pressures. Volatility of inflation, and inflation expectations The Committee’s strategy has warranted maintaining the very substantial monetary stimulus notwithstanding the marked pick-up in inflation over recent months. As the Governor explained at our press conference a fortnight ago, we think that the recent rise in inflation is accounted for mainly by the increase in petrol prices, the restoration of VAT to 17.5%, and lagged effects of sterling’s substantial depreciation. But we can’t be, and aren’t, comfortable about it. Not least because the country has to trust us that these will be temporary disturbances.
This country suffered too much from the inflationary booms and busts of the past for us to take risks on that score – in either direction. QE: the stimulus to nominal demand, and the financing of the banking system To avoid the downside risks, we need to help to revive the economy. And the monetary stimulus is, of course, directed at a big deficiency of nominal demand in the economy. At our latest monthly meeting in early February, the MPC maintained Bank Rate at 0.5% and the stock of money injected via asset purchases at £ The money market yield curve has edged down slightly since then. Over the past year my colleagues on the MPC have variously set out the key mechanisms through which Quantitative Easing (QE) should work. I shall not go over all that ground today, but there is unavoidable uncertainty about the speed and potency of QE’s effects. I am minded to think that some of the effects will come through fairly gradually. And therefore I would stress that the monetary stimulus from QE has not stopped. The flow effect of our bond purchases on gilt yields is not the beginning and end of how QE provides monetary  4  BIS Review 21/2010  stimulus. Plainly the mechanisms through which our money injections affect the economy differ in some respects from the transmission of changes in Bank Rate, which in an economy with a lot of (net) floating-rate debt can affect household and business borrowers’ cash flows quickly.