Twenty years ago, the City was anxiously awaiting its revolution - Big Bang. If ever there was an example of structural change in response to global competition, Big Bang was it. None of the leading broking and jobbing firms of the time now survives. Yet the City, and the people who work here, are more successful today than at any time in its history. Few in 1986 could have imagined how much the City would change and how far its domain would extend - from Canary Wharf to the West End, no longer a single Square Mile but a banker’s dozen. A key ingredient of the City’s success has been, as the Lord Mayor remarked, a stable set of rules within which to play up and play the game. Simple, clear rules of the game are essential for a market economy to function. But excessive regulation makes life difficult for us all. In March of this year I received a letter from a certain government department which read as follows: “Dear Mr. King; I am writing to inform you about how the changes to Crown immunity … in relation to planning legislation, will affect flying national flags … . Flags are defined as advertisements under the Town and Country Planning (Control of Advertisements) Regulations 1992. Under these regulations you are allowed to fly the national flag of any country … from a single vertical flagpole without requiring the prior express consent of the local planning authority.
Markets need to form a view on the probabilities of different paths of future interest rates in order to price a wide range of financial instruments. So they are interested in what central banks say. In recent months both the Federal Reserve and the European Central Bank have found it far from straightforward to convey the likely trajectory of future interest rates. And the Fed announced three weeks ago that Chairman Bernanke had established a subcommittee of the FOMC to examine a number of “communication issues”. There is now a lively debate about how, and to what extent, central banks should try to communicate their intentions with respect to future official interest rates to financial markets and the wider public. At the Bank of England, our approach is to keep it as simple as possible. We don’t say where interest rates will go next for the simple reason that we don’t know. And it would be quite misleading to pretend otherwise. The MPC reaches a new judgment each month, made afresh in the light of all the new information about the prospects for inflation. We don’t decide in advance. So trying to give direct hints on the path of interest rates over the next few months risks deceiving financial markets into believing there are definite plans for the next few months when no such plans exist. But in order to form judgements about the likely path of interest rates over somewhat longer time horizons, markets do require some information from the central bank.