BIS Review 116/2006  5  While demand has not been growing unusually slowly over the past year, it is now two and a half years since it grew at a rate significantly above its longterm average. And that average could be an underestimate of how fast we could safely grow. Even so, there is a risk that a temporary rise in the inflation rate will spark off inflationary pay increases. And if that were to happen, the MPC would need to raise interest rates to restrain demand and bring inflation back to target. I thought this risk looked quite significant in August when – as the Governor said at the time – the Committee saw a 50/50 risk that consumer price inflation would rise above 3% this winter. At the same time, the latest figures were confirming that the economy had recovered its momentum. So it seemed prudent to take back the modest cut in interest rates which the Committee had narrowly voted for the previous August. I cannot speak for other MPC members. But for me, raising rates this summer was akin to buying insurance against the risk that a possible spike in inflation – which we could do little to avert – would cause people to revise up their expectations about future inflation, and maybe dent the credibility which the Committee had built up over the previous decade.
In the area of the SSM, these restrictions are particularly significant at the moment since, given the variety of supervisory practices and cultures in place, only adequate codifying of rules and procedures can help to ensure that banks are treated equitably, even if this means that some of the benefits, in terms of supervisory effectiveness, that an appropriate amount of discretion involve, have to be sacrificed. Clearly, as the new European supervisory regime matures, we must strive to develop a specific action framework that incorporates the best practices and that is sufficiently robust to enable its application to be adapted appropriately to each specific circumstance. Thank you for your attention. 4  BIS central bankers’ speeches