Hence, macroprudential policies need to play a very important role. But what a central bank can or cannot do is and will remain an interesting topic of debate. It now seems beyond all doubt that the “inflation first” approach may become counterproductive in an environment of financial instability, which would rather call for preserving a certain tactical flexibility in conducting the monetary policy. Over the medium and long term, failure to maintain financial stability may only lead to a renewed flare-up in inflation. This reminds me of standard aircraft safety instructions, according to which, in case of cabin depressurization, the parent should put the oxygen mask on his own face and only afterwards tend to the child (who, in most cases, is the parent’s reason to live). While looking at long-term price stability as its fundamental objective, the central bank needs to keep a close eye on financial stability and, I would add, on the overall developments in macroeconomic indicators. Otherwise, disinflationary gains – however spectacular they might seem at a given point in time – would become utterly unsustainable. 6. The adequate level of inflation: “low and stable” vs. “moderate and stable”  The present crisis brought forward for discussion not only the primary objectives of the monetary policy I have already referred to, but also the adequate level of such objectives. Apart from semi-accepting the idea that financial stability must be a monetary policy objective, economists have also called into question the inflation level that must be targeted. Recently, Blanchard et al.
Its supervision focuses on issues such as the financial strength of the whole firm, including the adequacy of its liquidity and the resolution plan for the firm (collaborating with the Special Resolution Unit and home authorities to develop such plans in colleges or Crisis Management Groups as applicable), taking into account the importance of the firm to the PRA’s objective.” “For UK branches of non-EEA firms where the PRA is satisfied that the home regulatory regime is equivalent, and where the PRA has assured itself over resolution plans and the home regulator’s supervisory approach, the PRA relies where possible on the home regulator’s prudential supervision. In these cases, the PRA focuses on collaboration with home regulators (including via supervisory colleges) and on resolution plans. In addition, the PRA takes a close interest in liquidity and ensures that there are senior individuals in the United Kingdom that are clearly responsible for management of both the UK operations and business booked in the United Kingdom. The PRA discusses and agrees with the home regulator the areas in which it will seek to rely on the home regulator’s supervision”. This Approach document concluded that the PRA would in due course publish a fuller statement on our approach to the supervision of overseas firms operating in the UK. To take that forward, over the summer the PRA Board, acting in its new statutory capacity considered our policy further.