8 The Chancellor’s annual remit letter sets out that the ultimate purpose of pursuing this objective is that “a strong and stable financial system supports economic growth, facilitates the provision of finance to support the expansion of the economy’s productive capacity and underpins the UK’s position as an important global financial centre”. 10  All speeches are available online at www.bankofengland.co.uk/news/speeches  10  could include those that increase the efficiency of financial services, level the playing field between existing firms and new entrants, or that support the development of new products and markets. The FPC’s setting of macroprudential policy can be broadly characterised as minimising the loss function, ℒ: 𝑇  min ℒ ≡ 𝐸𝑡 {∑ 𝛽 𝑖 [𝑓(𝐺@𝑅𝑡+𝑖 ) − 𝜙𝑦𝑡+𝑖 ]} 𝜌𝑡  𝑖=0  where 𝜌𝑡 is a policy setting at time t, 𝐸𝑡 probability-weights all future states of the world conditional on information available at time t, 𝛽 is the discount factor, 𝑇 is the FPC’s time horizon, which should be thought of as representing the medium-to-long term, and 𝑓 ′ (·) < 0 and 𝑓 ′′ (·) > 0. The FPC’s primary objective is captured by the first term, 𝐺@𝑅𝑡+𝑖 , “GDP-at-risk”.9 This is the far-left tail of the forecast distribution of GDP, and is a summary measure of the impact of tail risks on the economy. GDP-at-risk can be thought of as the consequence of financial instability.10 𝐺𝐷𝑃𝑡+𝑖 is the central GDP forecast, which will over time be determined by the economy’s trend rate of growth.
That a period of relative price stability does not breed complacency? That the collective national memory is maintained? A key part of the answer can be found in the role of regimes and institutions.5 Individual policymakers and officials come and go. Intellectual ideas pop in and out of fashion. The inflation target and the MPC are the result of a long and painful search for a credible money anchor. They provide the memory to ensure that we don’t return to the inefficiency and inequity of the 70s and 80s. They provide the memory that underpins the consensus that low and stable inflation is a perquisite for economic prosperity. And they provide the memory that guards against some of the dangerous talk of late. Let me sum up this section on the twin objectives of monetary policy. The MPC has objectives for growth as well as for inflation. The current inflation targeting regime provides considerable flexibility for the MPC to support output and employment. And in recent years, the MPC has used that flexibility to the full. Indeed, some have argued excessively so. The MPC has been at the forefront in supporting growth and employment and continues to be so. But that flexibility is constrained by the discipline that monetary policy must be set in a manner consistent with inflation coming back to its target. Without that credibility, monetary policy wouldn’t have the flexibility to support the real economy.