Chart 10 – Monetary policy, the global economy and inflation Impact of monetary policy Cost of imports Exchange rate  Global economy  Demand  Domestic demand  UK inflation  Expectations and credibility Pricing climate  In the future, we may not be able to achieve the high degree of stability for growth and inflation that we saw in the MPC’s first decade. But our experience also suggests that we are not powerless to act in the face of significant global economic changes either. Chart 10 illustrates the main channels through which monetary policy can stabilise an open economy like the UK in the face of fluctuations in global demand or prices. The stabilising role of  10  BIS central bankers’ speeches  monetary policy operates through three main channels – the exchange rate, demand conditions and by influencing inflation expectations and enhancing the credibility of the monetary framework. And even though monetary policy will affect the growth of the economy in the short-term, the overall objective for UK monetary policy is and should remain price stability. That is because stable prices provide the best climate for growth, investment and business success in the longer term. The price stability objective provides the ultimate benchmark to guide how policy should respond to changes in the economic climate.
And if developments turn out as we expect, inflation will return to target with little rise in unemployment. We project some rise in unemployment, but from a very low level, and a slightly smaller rise than we anticipated in December. Wage growth is expected to slow from next year, but lower inflation will probably result in firm growth in purchasing power in the years ahead. Let me emphasise that the forecasts are precisely that – forecasts – and not a promise. If the krone proves weaker than projected, or pressures in the economy persist, a higher policy rate than currently projected may be needed to bring inflation down to target. If inflation falls faster or unemployment rises more than projected, the policy rate may be lower than projected. 3/3  BIS - Central bankers' speeches