Lags, trade-offs and the challenges facing monetary policy Speech given by Ben Broadbent, Deputy Governor, Monetary Policy  Leeds University Business School 6 December 2021  I’ve received helpful comments from colleagues at the Bank of England. I’d like to thank Fabrizio Cadamagnani for his help in preparing the speech. The views expressed are my own and do not necessarily reflect those of the Bank of England or other members of the Financial Policy Committee or the Monetary Policy Committee. 1  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  Good morning! Thank you for asking me to speak to you today. It’s a great pleasure to do so in person, something I haven’t been able to do for almost two years. Virtual meetings are all very well – and were clearly indispensable during the worst of the pandemic – but I think there’s something missing if that’s the only way in which we ever talk to each other. It’s an additional pleasure to be in Leeds. As you may know, as part of a plan to increase our staff presence across the UK we announced earlier this year we’d be setting up a new hub right here in Leeds. I’m coming here at an extraordinary time for the economy in general and for monetary policy in particular. Annual CPI inflation rose to over 4% in October, with the jump in domestic energy bills the single most important contributor to the change on the month.
This is in the nature of what’s called a “trade-off-inducing” shock, one that pushes the primary objective of policy (stabilising inflation) in one direction, the secondary objective (stabilising demand and employment) in the other. These things crop up all the time, to one degree or another. Prices of imports (especially energy) are volatile; slowdowns in productivity growth, which are common enough, can sometimes have the same effect10; so can rises in excise duties or VAT. But, in reality, these things rarely have much of a bearing on policy because, very often, their impact on inflation doesn’t last long enough. Changes in interest rates take time to work. And if a shock to inflation is gone before monetary policy could do anything to offset it there’s not much point in taking action. This hasn’t always been the case. After the Brexit referendum, for example, the MPC judged that the inflationary consequences of the big drop in sterling’s exchange rate probably would last long enough to matter at the “policy horizon” (as had been the case after the financial crisis). The Committee therefore had to balance this effect against the fact that, for much of that period, the economy was operating with a degree of space capacity. There’s a good chance that this shock too, larger though it is, will have dissipated by the time a policy decision taken now could take effect. Indeed it’s quite possible that, in a couple of years, some of these tradable goods prices will be falling, pulling down on inflation.