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%.
The stability charts – 3a and 3b – show the stability of growth and inflation in the G7 countries in the two time periods. In these charts a good performance is to be near the origin of the axes, close to the bottom left hand corner of the chart. The rather poor performance of the United Kingdom prior to 1997 is evident, as is the remarkable degree of stability in the United Kingdom relative to the rest of the G7 after that date. Of course, correlation does not imply causation. And there is little reason to suppose that the MPC is responsible for the higher average growth rate over the past decade. That more likely reflects structural changes in the UK economy, associated with other policy reforms. It is the stability of the UK economy which appears to be the most marked contribution of the MPC. That is a surprise. The conventional wisdom is that, although there is no long-run trade-off between the levels of inflation and output growth, there is a trade-off between the stability of inflation and of output growth. Inflation can be kept closer to the target only by larger changes in interest rates and bigger fluctuations in output growth. Policy-makers thus face a choice between different combinations of inflation and output growth volatility, which, when plotted on a chart, describe a “stability possibility frontier”.5 They can choose a point on that frontier depending on the relative importance they place on stabilising inflation and output growth, but they cannot move inside it.