Until last August, the MPC had shied away from providing such explicit guidance, lest it be misinterpreted as a promise independent of the state of the economy. Instead we preferred to provide an implicit steer through the medium of the projections contained in our quarterly Inflation Report. Last August, however, the MPC decided that more explicit guidance about our reaction function could be helpful. Rather than aiming to provide more stimulus as in the academic literature, we were merely seeking to ensure that the recovery was not nipped in the bud by a premature rise in market interest rates, despite there still being a significant margin of economic slack. We said then that we would not even countenance a rise in Bank Rate until unemployment had fallen to 7%, subject to overrides relating to excessive upward movements in inflation expectations and to the risks to financial stability, the latter being policed by the Financial Policy Committee. We chose unemployment in part because its behaviour is directly linked to one of the key uncertainties at the current juncture, namely the scope for a recovery in productivity. This has been unusually weak since the onset of the crisis for reasons we do not yet fully understand (Chart 2). If productivity rebounded, then unemployment would fall slowly. But in that case, there would also be more scope to maintain an expansionary policy before inflationary pressures began to rise.
First, we have less of a handle on their impact than we do changes in short-term policy rates and, as I just indicated, that impact may well be less when markets are functioning normally. Second, if the central bank routinely deals in large quantities of government debt, it may find itself more open to pressure from the fiscal authorities, while market participants are more likely to fear that the debt will be permanently monetised. That brings me naturally to the topic of unwinding our present large stock of asset purchases. We have committed to maintaining the stock, including reinvesting the cash flows associated with maturing gilts, at least until the first rise in Bank Rate. But at some stage thereafter, as part of the transition back to normality, we expect to start running down the portfolio and withdrawing the associated bank reserves. In principle, we could do this just by letting the gilts mature. However, as Chart 5 demonstrates, it would take a long time to run off organically in its entirety because of the relatively long average maturity of the gilts held: the weighted average maturity of the portfolio is more than 12 years. So more active sales may be called for at some stage,  2  For the United Kingdom, see: Michael Joyce, Matthew Tong and Robert Woods (2011), “The United Kingdom’s Quantitative Easing Policy: Design, Operation and Impact”, Bank of England Quarterly Bulletin, 51(3), pp.200–212.