Mervyn King: The MPC ten years on Lecture by Mr Mervyn King, Governor of the Bank of England, to the Society of Business Economists, London, 2 May 2007. I am indebted to Alex Brazier, Iain de Weymarn, Richard Harrison, James Proudman, Chris Salmon, Tim Taylor and Ryland Thomas who have worked closely with me on this lecture. *  *  *  Not long before his untimely death, David Walton invited me to deliver this lecture. Anyone who knew David will be desperately sad not only that he is no longer with us to ask important questions and make us smile at his dry humour, but even more so that he is unable to take his place at the deliberations of the Monetary Policy Committee to which he contributed so much in such a short space of time. David had a wonderfully clear mind, an independence of thought, and was a warm and generous colleague. He is, and will continue to be, deeply missed. David asked me to look back on the experience of the first ten years of life with the MPC and to try to learn from that experience. So, in his memory, that is my aim this evening. Although the announcement in 1997 of independence for the Bank of England was a bolt from the blue, it was a long time in the making. During the 1970s inflation in the United Kingdom averaged 13% a year and peaked at 27%.
Behind this favorable response of the Chilean economy lies a macroeconomic policy framework able to pursue an effective reaction, and a regulatory scheme supporting the high resilience of the domestic financial system. In Chile the monetary policy framework consists of a flexible inflation-targeting regime with a floating exchange rate. This framework has allowed us to respond efficiently to external shocks keeping inflation expectations anchored. Before the Asian Crisis of 1998, we had a managed exchange rate and we had capital controls in place to allow monetary policy independence to manage inflation in a context of abundant capital inflows. Indeed, we experienced a costly adjustment to that episode, and this was fueled in part by financial stability concerns that called against an exchange rate adjustment. But once the harder times had passed, the exchange rate was allowed to float freely, facilitating not only the external adjustment against shocks but also improving the incentives for private agents to properly hedge their foreign currency operations. The deep-rooted credibility of our Central Bank has also facilitated the conduct of monetary policy with a floating exchange rate system. The fact that the market understands that the Central Bank pursues a goal for inflation at a 24-month horizon means that the exchange rate pass-through to inflation is relatively low, indeed the lowest in the region. This can be illustrated with the reluctance of the Central Bank to tighten monetary policy in 2015 despite a 49 percent devaluation in 2014-2016, and without affecting 24-months-ahead inflation expectations, which remained anchored at the target level.