But I realise that some more structured answers have to be given at some point, and that’s what I would like to do today. As you all well know by now, the ECB has been assigned the primary objective of maintaining price stability in the euro area. The ECB therefore has no choice but to take a euro area perspective: its policy decisions aim at area-wide price stability. Those decisions draw on all available information, including that deriving from national indicators, but they cannot be tailored to the specific needs of a single Member State. As we have seen, economic divergences can emerge and persist across countries and regions within the euro area. In principle, there are several reasons why such variations in growth or inflation may emerge within a monetary union. Initial differences in the level of development or income may lead to some countries catching up with the area-wide average through a period of faster growth, associated with relative price changes.1 Certain economic shocks may affect the economic performance of one country but not another.2 The transmission of monetary policy may differ across countries and regions because of variations in economic and financial structures.3 Although the economic literature prior to the introduction of the euro emphasised the importance of asymmetric shocks, the cross-country variation in growth and inflation in  1  One explanation of these catch-up effects is the so-called Balassa-Samuelson effect, see: Balassa, B. (1964). “The purchasing power parity doctrine: A reappraisal,” Journal of Political Economy 72, pp.
However, if interest rates were moved up gradually from current levels, in a well-communicated strategy that was understood by the public, the business community and financial markets, the cost of borrowing would still be low in real terms and I do not believe that the recovery would be seriously damaged. Indeed, for the many UK households which rely on the income from savings and investments, this could provide a powerful boost to confidence by signalling the beginning of a return to more normal economic conditions. The other very important way in which monetary policy can support recovery is by maintaining confidence in price stability over the medium term. The mandate for the Monetary Policy Committee makes clear that the best contribution that the MPC can make to sustained economic growth is by maintaining price stability – which is specified in terms of a 2% target for CPI inflation under our current remit. There are good reasons why low and stable inflation remains the focus of our monetary policy. The effects of high inflation are damaging in their own right – eroding the value of savings, hitting pensioners on fixed incomes and creating an uncertain and volatile business climate. After inflation got out of control in the UK in the mid-1970s, we experienced two decades of economic volatility and high unemployment, including three major recessions. Fortunately, there is little risk today of a return to that era of double digit inflation rates.