First, I will review the conduct and performance of inflation targeting during my time as Governor. This period, which roughly coincides with the post-crisis recovery and which has seen more than its share of shocks and structural developments, provides some insights to the ability of inflation targeting to deliver price stability and support macroeconomic outcomes. I will suggest that, so far at least, inflation targeting has proven to be a framework for all seasons, an essential part of a robust foundation for economic prosperity. It is important not to lose sight of the fundamental success in achieving price stability that has resulted from delegation of inflation targeting to an independent central bank. In the two decades prior to independence, inflation averaged over 6%. Since independence, it has been close to 2% and one-fifth as volatile (Table 1). Inflation expectations have remained well anchored throughout some of the largest economic shocks in postwar history.
People understood the conditionality of guidance, as they and the MPC had learnt that there was still considerable spare capacity in the economy. Chart 7: Interest rate volatility has remained low since guidance was provided Standard deviation of option-implied distributions for 3m LIBOR in 12-months’ time Basis points 180  August 2013 guidance issued  160 140  February 2014 guidance issued  120  EU referendum  100 80 60 40 20  2000  2002  2004  2006  2008  2010  2012  2014  2016  2018  0 2020  Sources: Bloomberg Finance L.P., Chicago Mercantile Exchange (CME), Intercontinental Exchange (ICE) and Bank calculations. 9  All speeches are available online at www.bankofengland.co.uk/news/speeches  9  The improved transparency of the inflation targeting framework also promoted this smooth learning process about the supply side that helped maximise economic outcomes. Starting in 2014, the MPC began carrying out a stocktake of the supply side of the economy each year, publishing its best collective judgments on the natural rate of unemployment, the output gap, as well as the expected growth in productivity, labour supply and potential output.9 As part of these exercises, the MPC revised down its (hitherto private) estimate of equilibrium unemployment rate from 6½% in August 2013 to 5½% in August 2014, 10 though it also judged that spare capacity in the UK economy was gradually being used up as demand was growing rapidly while supply growth was still subdued. In short, spring was gradually turning to summer. II.