Several stylised facts in macroeconomics – such as the idea that deeper recessions are followed by stronger recoveries, and the idea that productivity can be relied upon to increase over time around a long-standing trend – have been long since disproven by the nature of the recovery in the UK. And questions remain about the how the economy operates in the wake of the Great Recession that make the setting of monetary policy more challenging. In the rest of this speech I would like to put forward some thoughts on how one should approach decision taking in the face of such uncertainty. I will highlight three themes: proceeding with caution, considering all of the outcomes and retaining flexibility. I do so as a member of the Monetary Policy Committee, though you should note that what follows are my own views and may not necessarily represent the views of the committee as a whole. I don’t think other members place quite so much weight on tyre tread depth as an indicator, and they probably wouldn’t thank me were it to be deemed a bellweather for interest rate decisions in the future. 1. Proceed with caution  It is now 81 months since Bank Rate was cut to its current level of 0.5%. It has taken a lot of hard work since then to generate the recovery we are now experiencing.
Retain flexibility  Of course one can never know exactly what the future holds. So when the time does come to raise Bank Rate, it will be important to retain the flexibility to change course if needs be, either by tightening policy more quickly than originally envisaged or by being prepared to loosen again. Were it required to respond to unforeseen events, the MPC would have two tools at its immediate disposal: Bank Rate and QE. Past experience gives us a good dataset from which to gain an understanding of how changes in policy rates transmit to the economy. Based on a rich literature of international estimates over the period since inflation targeting began, the peak impact on inflation is generally estimated to occur with a lag of between 18 and 24 months, although it begins to  5  See Shafik (2015) and Broadbent (2015) for more on this issue. 6  Though should proposed legislation pass, the number of MPC meetings per year will reduce from 12 to 8, in line with the recommendations of the Warsh Review (Warsh, 2014)  7  The market curve represents the mean of the priced distribution of interest rates. Consideration of risks can cause this whole distribution to move relative to true expectations. Risks can also affect the shape of the distribution, though Dison and Elliot (2015) found that the shape of the distribution is currently being heavily influenced by the proximity of Bank Rate to the effective lower bound.