And although the downward pressure on inflation from movements in energy prices and the exchange rate are proving persistent, they will not have a permanent effect on inflation. But, there is residual uncertainty about the relationship between the real economy and inflation – something economists refer to as “model uncertainty” – which in this instance augurs for caution in setting monetary policy. 4 The most likely outcome is that wage growth will soon resume its recovery, but there are alternative states of the world in which it takes longer for that to happen. So I judge it prudent to tread carefully, and refrain from voting for an increase in Bank Rate until I am convinced that wage growth will be sustained at a level consistent with inflation returning to target. 4  The effect of uncertainty in the setting of monetary policy is much discussed. Brainard (1967) shows that when policymakers are uncertain about the effects of their actions on the economy, it is appropriate to move more cautiously than if the impact of policy is certain – a strategy known as gradualism. Data uncertainty is another reason why policymakers may adopt a gradualist approach. One common finding is that when data are noisier, a less aggressive response is desirable (Rudebusch, 2001; Orphanides, 2003). In addition, more recently, Evans et al (2015) have argued for delaying lift-off in the face of uncertainty about the strength of the recovery, given a view that there are asymmetric costs associated with the zero lower bound.
9  For example, in his 2009 letter to the Chancellor requesting the MPC be able to use the Asset Purchase Facility for monetary policy purposes, the then Governor, Mervyn King said “At some future date, I would expect that the MPC would wish to exit from the strategy of buying assets and would wish to reduce the amount of assets held under the Asset Purchase Facility.”  10  See for example Alesina and Summers (1993), Klomp and De Haan (2009) and King (2013). BIS central bankers’ speeches  5  Conclusion Let me sum up. We are still learning how the post-crisis economy behaves, and some relationships in the data have proven slow to reassert themselves or may have changed. The recent plateau in wage growth despite the ongoing recovery is one example, and I will wait until I am convinced that wage growth will be sustained at a level consistent with inflation returning to target before voting for an increase in Bank Rate. In this sense, I will proceed with caution. But once I am convinced, absent further shocks, I can see Bank Rate rising more quickly than the path implied by the market curve at the time of the last Inflation Report. That is not to say I don’t understand the shape of the yield curve – market participants must consider all of the possible outcomes when making their decisions, and the yield curve could be weighed down by worries about the world.