Otmar Issing: Should we have faith in central banks? Speech by Professor Otmar Issing, Member of the Executive Board of the European Central Bank, held at St Edmund’s College Millennium Year Lecture, Cambridge, on 26 October 2000. *  *  *  Ultimately, trust must be earned, it is granted temporarily, it must be checked, and it must be backed up by hard evidence, not be based purely on faith or belief. It is a great honour and a great pleasure for me to deliver the St. Edmund’s College Millennium Lecture on the topic of faith in central banking. I must confess that when Professor Heap first invited me to give a talk on “Faith and Finance in the New Millennium” as part of a series of lectures on the general theme “Faith in the Future” I suffered an initial instant of hesitation or lack of faith, if you will. As you can imagine “faith” is not a natural subject to discuss for a central banker and economist, who is trained to look at facts and hard evidence. To address such a difficult issue in such a distinguished seat of learning as Cambridge University would seem to require a good measure of courage. But then, of course, courage - if not faith - is an attribute that central bankers should undoubtedly possess. I am also much reassured and grateful for the faith, if I may say so, that you put in me by inviting me to talk about this subject.
To what extent does this sketch resemble the current situation in the UK? As its policy stance reflects, the Monetary Policy Committee (MPC) judges that the equilibrium real interest rate has been, and continues to be, negative. Despite very low interest rates, resources are not fully employed. 850,000 more people are out of work than in the years before the crisis and GDP is around 20% below an extrapolation of its pre-crisis trend. As bad as these figures are, the scale of the mismatch between aggregate supply and demand has not been large enough to generate a deflationary spiral. Despite persistently weak nominal wage growth, rising import prices and weak productivity growth have meant that the UK’s problem has been the need to bring inflation back to the target from above. In this regard, there has been welcome progress. Headline inflation has fallen back much sooner than we expected at the start of the year, and core inflation measures are running close to but slightly below the 2% target. What then of the risks of unbalanced growth? This is more delicate. Despite admirable progress by British households in recent years, aggregate debt levels remain high at 140% of incomes. In addition, housing activity is picking up and price growth appears to be gaining momentum. Moreover, the UK current account deficit is near record levels. These developments merit vigilance but not panic. The housing recovery could reflect higher future income expectations, prompted by the nascent recovery, and better credit conditions.