As we said in our press release in September, an early move in interest rates “could lower the level at which interest rates might otherwise need to be set”. That is why we raised interest rates last month and why the MPC is committed to the consistent pursuit of a symmetric inflation target. But that is not all. The new monetary policy regime is probably the most transparent and open in the world. We are committed to explaining our policy – both to improve the efficiency of monetary policy itself and also to build up support for what we are doing. Try going onto the Bank of England’s website – the address is www.bankofengland.co.uk – and you will find there the minutes of our meetings, as well as the Inflation Report, available to everyone. You will even find a copy of this speech. You may not always agree with our decisions, but I do hope you will understand the reasons for them. Since the MPC was set up, there is, I think, a better understanding of what we are trying to achieve. Most of those who disagree with particular interest rate decisions accept that it does make sense to have an inflation target. Some might wish that we interpret the inflation target in a way that better serves the interest of their own sector of the economy, but that would be to court popularity in the short term at the expense of achieving low and stable inflation in the long term.
But at times, even a well-run bank can suffer an unexpected shortage of liquidity. To mitigate that risk, the central bank provides back-stop liquidity insurance to both individual institutions and to the system as a whole under stress (as in the aftermath of Lehman’s collapse, reflecting a system-wide increase in both credit and liquidity risk). The objective is to reduce the cost of liquidity disruptions for solvent and viable institutions and so maintain the flow of payments services of the UK financial system. But in meeting that objective, the Bank must ensure that it guards against moral hazard, by setting the incentives in such a way that discourages anything but exceptional use of our facilities, and that it adequately protects its own balance sheet from risk of loss. 5 Operational Standing Facilities The process of reserves averaging should deal with small unexpected liquidity shortages or long positions. For larger shocks, the most immediate short-term form of liquidity insurance is the Bank’s Operational Standing Facilities which, as well as helping keep short-term interest rates close to Bank Rate, can help individual firms cope with frictional stress such as operational disruptions and short-term volatility in market interest rates. Under these  4  Since lending to the Bank is free from credit risk, it is the secured overnight rate – up to the next MPC decision date – that should be broadly in line with Bank Rate.