John Gieve: Seven lessons from the last three years Speech by Sir John Gieve, Deputy Governor of the Bank of England, at the London School of Economics, London, 19 February 2009. *  *  *  Introduction As you know I am about to leave the Bank of England after three years as the Deputy Governor responsible for its work on financial stability and as a member of the Monetary Policy Committee. It has been a game of two halves. The first 18 months from January 2006 to July 2007 were the tail end of the Great Stability, a period of nearly 15 years of continuous growth, low inflation, and falling unemployment. They were guided by and reinforced a wide consensus that economics had discovered the right way to manage the economy and that the UK was a good model of how to put it into effect. The second 18 months have seen an extraordinary reversal: with turmoil in financial markets, the credit crunch, and the onset of a severe global recession calling into question nearly every part of that consensus. The immediate challenge is to limit the depth and duration of the recession and bring the economy back onto a sustainable path with low but positive inflation. But we have just set out our analysis of the economy in our February Inflation Report and Charlie Bean explained the policy options we face in a speech earlier this week.
It is crucial in a period of economic hardship – with companies going to the wall and people losing their jobs – that people do not think the Bank is focused on a narrow inflation target for its own sake. If they feel that we are not accepting responsibility for what happens to growth and jobs, they will look for someone else to do so. If we want to preserve the framework we have a job on our hands – now more than ever – to explain our strategy to the general public. The Bank and MPC need to convince them that the policy we are pursuing is the best way of restoring growth and full employment without reawakening inflation. Indeed it is by bringing output back to potential that we will bring inflation back to target. Secondly, I share the view that setting a target for a measure of consumer price inflation which excludes the costs of home ownership has done us no favours. It is widely recognised as a flaw in the harmonised CPI across Europe but it is of particular significance in the UK given the critical role that home ownership plays here in household budgets and wealth. Something needs to be done to remedy that situation, and if progress can’t be achieved at a European level I think we ought to consider going it alone. More fundamentally, if inflation targeting by an independent central bank is an essential foundation of policy, it is pretty clearly not sufficient on its own.