As someone who has argued in the past – often in the face of considerable scepticism – for the importance of monetary and credit mechanisms in monetary policy transmission,18 I find these channels both plausible and potentially important, even if the evidence on their empirical impact is mixed, perhaps reflecting the state contingency of both the signalling and portfolio balance channels. Central banks should certainly be wary of suggesting that their armoury is exhausted when policy rates reach their effective lower bound. Such a view both risks creating deflationary dynamics through a self‐fulfilling prophecy and denies the ultimately monetary origins of price level developments. Asset purchases as a complement to changing Bank Rate Second, central bank asset purchases (and other market interventions) can be understood as efforts to maintain  Bank of England  Page 10  the conventional interest rate channel of monetary policy transmission. By their nature, such efforts are complements to, rather than substitutes for, changes in Bank Rate. To maintain monetary transmission through conventional channels at times of market stress, central banks may need support to the private sector, so as to maintain the functioning of financial markets, institutions, and infrastructures. This has a long history: dealing with ‘banking panics’ towards the end of the nineteenth century was an important motivation for the creation of the Federal Reserve, for example; and the famous Bagehot Rule governing the provision of liquidity support to the banking system has been an important guide for central bank policy for more than a century.
Looking back at the first speech I gave as an MPC member this time last year,8 gas prices barely featured. Rather the focus was on supply chain disruptions and the potential threat of the Omicron variant, which had just started to emerge as I spoke in Newcastle. Second, the shock was large. Although it has eased somewhat in recent months, the January European wholesale gas price future – most relevant for next year’s household energy bills that enter the CPI basket – rose more than ten times to its August peak. Third, these gas price rises passed-through to the CPI inflation that the MPC targets relatively quickly: in a matter of months – certainly at a shorter horizon than the 18-24 months typically associated with the lagged pass-through of monetary policy actions to inflation developments. And fourth, higher gas prices exerted an adverse supply-side effect on the UK economy, and thus induced a difficult trade-off for monetary policy: inflationary pressures rose at a time when economic activity weakened. Taken together, these characteristics implied that gas price driven volatility in CPI inflation was inevitable.