Mervyn King: The inflation target ten years on Speech by Mr Mervyn King, Deputy Governor of the Bank of England, delivered to the London School of Economics, London, 19 November 2002. The references for the speech can be found on the website of the Bank of England. * 1. *  *  Introduction  Ten years ago, in this very room, Robin Leigh Pemberton (then Governor, now Lord Kingsdown), delivered the first LSE-Bank of England Lecture. It was entitled “The Case for Price Stability”. In the twenty-five years prior to that lecture, prices had risen by over 750%, more than over the previous two hundred and fifty years. So the audience on that evening in November 1992 had grown up in a world in which rapidly rising prices appeared inevitable. They were the inflation generation. To them price stability seemed remote. Inflation was simply taken for granted. But that LSE-Bank of England Lecture coincided with the introduction of a new monetary framework the inflation target. Since then price stability has become a reality. Over the past decade inflation has averaged 2.5%, and has been no lower than 1.5% and no higher than 3.3% Alan Greenspan defined price stability as when “expected changes in the average price level are small enough and gradual enough that they do not materially enter business and household decisions.” With inflation expected to remain close to 2.5%, it is no longer a material concern to families and businesses in this country.
While these measures have merits in safeguarding financial stability, they could have complex and cross-border impact. Even on the monetary policy front, unconventional measures are becoming more conventional. Central banks in the major economies have increasingly used unconventional monetary easing. Though necessary to stabilize their economies at this juncture, these policies have side effects of large and volatile capital inflows into Asia. This  BIS central bankers’ speeches  1  further complicates safeguarding of financial stability in other countries including Asia, and could, in turn, trigger some countries to resort to macroprudential measures themselves. Thus, in terms of policy space, we are dealing with a new paradigm of expanded policy tools, with new transmission mechanism, and requiring their own policy framework and governance. So we need to recognize the need for cross-border coordination as well as flexibility in execution given emerging uncertainty. Turning to the more medium-term structural issues, major regulatory reforms especially Basel III, Financial Stability Board reforms, and Dodd-Frank Act are still a known-unknown. We do know that they are designed to redress weaknesses that caused the crisis by enhancing capital and liquidity, while addressing the problems of procyclicality, and too-big-to-fail of SIFIs. For this, their merits are well recognized. But these reforms will reshape the global financial landscape and raise cost of financial intermediation. They will also have implications for cross-border level playing field, regulatory arbitrage, and alter risk profile of banks.