Alan Blinder, who was Alan Greenspan’s deputy at the Federal Reserve Board, put it even more clearly. Price stability, he said, was when ordinary people stop talking and worrying about inflation. And so successful has been the pursuit of low inflation that some commentators have talked about the “death of inflation” and others have become increasingly concerned about the prospect of deflation. Tonight I want to re-examine the case for price stability, and ask the following questions. Did the benefits of low inflation promised ten years ago materialise? Is the case for price stability the same as in 1992? What does price stability mean in practice? Finally, what are the challenges for monetary policy over the next decade? 2. Ten years of the inflation target: what has it achieved? Since Britain’s departure from the Exchange Rate Mechanism in September 1992, monetary policy has been based on an explicit numerical target for the rate of inflation - now 2.5% - and a high degree of transparency and accountability. Indeed, it was in his LSE lecture that Lord Kingsdown announced that the first Inflation Report would appear in February 1993. And last week’s Report completes exactly a decade of Inflation Reports - forty assessments of the outlook for growth and inflation in the British economy. Although inflation targeting in the United Kingdom is now ten years old, the most significant institutional changes occurred five years ago.
The introduction of the SNB policy rate in June 2019 marked the end of the SNB’s use of Libor in its monetary policy strategy. With this change, the SNB also eliminated Libor as its communication instrument. The change sent a clear signal to the financial markets that the end of the Libor era is inevitable. In addition, the switch ensured that our conditional inflation forecast for the next three years, a core element of our monetary policy strategy, will continue to be based on an existing and economically meaningful interest rate over the entire forecast horizon. To be sure, the significance of the money market extends far beyond its use in the transmission of monetary policy. The money market also plays a vital role in the economy’s credit transmission process. If money markets do not function properly, the credit extension process across the entire financial system will deteriorate, with serious consequences for the real economy. In times of financial system stress, ensuring that the money markets continue to function well becomes even more consequential, because efficient liquidity redistribution between banks and unencumbered lending are especially important for the economy in such circumstances. During the Global Financial Crisis from 2007 to 2009, the money markets were regularly compared with the bloodstream of a living organism, delivering oxygen to the body’s vital organs. The coronavirus crisis has certainly confirmed the fundamental importance of having well-functioning money markets. Finally, money market interest rates serve as reference rates for the whole economy.