And the terrorist attacks on September 11 2001, and the wars in Afghanistan and Iraq, added to uncertainty. So the environment in which the MPC has had to operate has not been without excitement. But did the economy respond to that excitement in a self-regulating way? It is clear from the performance chart that the supply side of the UK economy has undergone substantial change – the average rate of growth of output per head has increased from 2.1% between 1950 and 1996 to 2.4% in the past decade. It could be argued that the structural reforms of recent decades have made the UK economy and, in particular, the labour market, more flexible. Greater flexibility has enabled unemployment (and its natural rate) to fall steadily. Structural reforms also led to more stable growth of employment and output. If businesses are to stabilise employment in the face of changes in costs, employees must accept fluctuations in the real value of their take-home pay. When import prices fell sharply, employees benefited from rapid growth in real take-home pay. More recently, however, businesses have faced higher energy costs and employees have accepted somewhat weaker growth of real take-home pay. The acceptance of necessary adjustment in real take-home pay has helped to stabilise employment growth which, over the past decade, has been four times less variable than over the previous five decades. That has shifted the “stability possibility frontier” faced by the MPC inwards, enabling the MPC to keep inflation more stable than in the past.
First, I want to look at the changes in the behaviour of the UK economy in recent years. How far is the improvement attributable to the MPC? Second, I want to review how the MPC has operated as a decision-making body. Has the process lived up to its billing as the most effective way of reaching technical judgements on the level of Bank Rate? Third, and most important of all, I want to consider the challenges to the MPC for the next ten years. What can we learn from the experience of the first decade that may help us to improve over the next? 1. Changes in the UK economy  In examining the first ten years of the MPC a natural starting point is to ask what has been its impact on the UK economy since 1997. The objective of the MPC is, of course, to meet its inflation target. Chart 1 shows that since the mid-1990s, inflation in the UK has been lower than for a generation. And  1  How a decision would be reached in such unlikely circumstances is explained in King (2002a). 2  Not-so-bad is an acronym for the “not of the same order but also desirable” decade. See King (2004). 3  I am indebted to Professor Peter Hennessy who, in his admirable book Never Had It So Good: Britain in the 1950s, drew attention to the context of Macmillan’s remarks which were made in a speech in Bedford on 20 July 1957.