Our first priority must be to maintain low and stable inflation. Of late there have been those who doubt our ability or willingness to meet the inflation target. In May, CPI inflation was 3.4%, and for much of the past three years has been above the 2% target. Over that period the rise in prices in excess of that implied by the target was around 3%. That can be accounted for by the direct impact on the price level of the fall in sterling’s effective exchange rate, of about 25%, which is supporting the rebalancing of the UK economy. Inflation has not only been higher than in the previous decade; it has also been more volatile. Our ability to keep measured inflation close to the target has been hindered by movements in world oil and commodity prices, as well as the temporary reduction in VAT. Oil prices, for example, have gyrated between $ and $ a barrel. Although such price changes clearly lead to higher or lower CPI inflation for a period, by themselves they do not generate the continuous rise in prices to which monetary policy should respond. A continuous rise in prices would ordinarily be associated with strong money growth, wage inflation, rapid increases in money spending and an excess of demand over the supply capacity of the economy.
There are always risks to the outlook – on both sides – and to ignore them in either direction would be foolish. What the MPC must do is continually update its assessment of those risks, and set policy in order that, on balance, inflation remains on track to meet the target in the medium term. No one should doubt our determination to meet the target. The inflation target introduced in 1992, and the new regime for monetary policy decision-making introduced in 1997, have shown beyond doubt that monetary policy in the United Kingdom is dedicated to maintaining low and stable inflation. Indeed, for ten years, I was, to my frustration, regularly described as a hawk. But I am neither hawk nor dove. Everyone on the Committee votes according to his or her judgement of the outlook for the economy. I have not changed. The Committee has not changed. Circumstances have changed. When confidence, output and trade around the world collapsed in the autumn of 2008, the balance of threats to the inflation outlook shifted rapidly to the downside. So the Bank of England and central banks in other industrialised countries responded by reducing official interest rates nearly to zero and injecting money directly into the economy. There will come a time when our task will be to manage the exit from such an abnormal degree of monetary stimulus. The MPC will not hesitate to begin to withdraw the current degree of stimulus when we judge that is necessary.