Since August, the short- and medium-term outlook for inflation have both improved somewhat, as world oil prices have fallen back very sharply, and sterling has risen. The odds of inflation rising above 3% have lengthened. There are still no real signs of pressure in the labour market. And while it never does to be complacent about pay, in today’s labour market there is quite a difference between asking for higher pay and getting it – even in sectors not exposed to the full blast of global competition. There are, of course, still some risks. But insurance is never costless. In the case of monetary policy, taking out insurance against risks that don’t materialise can inject unnecessary volatility into the economy, with consequences for jobs as well as demand. That is why we have the remit we have. It gives the MPC scope to exercise its judgement. But those are precisely the sort of judgements about which reasonable people can – and probably - should disagree. So it was this month. One judgement about which reasonable people could disagree is how robust the Committee’s treasured credibility might be, if it ever came under real pressure. It is often said that it takes decades to build a high reputation but only a moment to lose it. And there are plenty of business horror stories that seem to prove the point. What moral should a member of the MPC draw?
But if inflation moves away from the target by more than 1 percentage point in either direction I shall expect you to send an open letter to me setting out the reasons why inflation has moved away from target …and the period in which you expect inflation to return to target’ In 1998 Charlie Bean, now (but not then) the Bank’s chief economist, calculated that open letters might be triggered at least 40% of the time, on the basis of past experience 3 . This did not seem unreasonable at the time. But after 114 monthly decisions, inflation has always been within 1 percentage point of the target. And I take the fact that no Governor has yet sent an open letter as further evidence that there has indeed been an unexpected increase in stability. 2  Mais lecture, June 1997. 3  “The new UK monetary arrangements: a view from the literature”, Charles Bean, Economic Journal 1998. 4  BIS Review 116/2006  Where are we now? Are we now entering choppier waters? The world economy continues to grow at an impressive rate, with few signs of sustained inflationary pressure. Globalisation continues apace. But it is not difficult to think of things that could go wrong, ranging from an outbreak of protectionism, to another sharp surge in oil prices in response to geopolitical events, to a sharp correction in housing markets, which in a number of countries are very richly valued.