What was the defining characteristic of this approach to policy, and other broadly contemporary frameworks developed by countries like Canada, New Zealand and Sweden? The best short answer is encapsulated in a term originally coined in 1997 by two US academics, Ben Bernanke and Frederick Mishkin (now Chair and member of the FOMC respectively). It is ‘constrained discretion’ 2 . Bernanke described this as “an approach that allows monetary policy-makers considerable leeway in responding to economic shocks, financial disturbances, and other unforeseen developments. Importantly, however, this discretion of policy-makers is constrained by a strong commitment to keeping inflation low and stable.” 3 In the UK, the Government is constrained by the institutional framework, which is set in statute. And the MPC is constrained by the need to meet the inflation target. But while the MPC are told what to do, they are not told how to do it. At the operational level, there is a lot of discretion. The commitment to meet the inflation target is fundamental, as a matter of law and economics. As long as it is credible, such a commitment will help to anchor people’s expectations about future inflation, and stabilise their response to unexpected shocks. But the scope to exercise discretion about how long temporary inflation disturbances will be tolerated is critically important too, for the performance and long term credibility of the framework. Of course it must be used with integrity – saying one thing and doing another, for short term advantage, is toxic.
Rachel Lomax: The MPC comes of age Lecture by Ms Rachel Lomax, Deputy Governor of the Bank of England, at De Montfort University, Leicester, 28 February 2007. I am very grateful to Gareth Ramsay for his help in preparing this speech, and also James Proudman, Tony Yates and other Bank colleagues for their help in preparing this speech, and to a number of colleagues at the Bank of England for useful comments. * 1  *  *  Introduction  It’s a great pleasure to be in Leicester tonight, particularly given my long association with De Montfort University, as a Governor. Tonight I want to focus my remarks on the Monetary Policy Committee, which is ten years old this year. This is a blink of an eye in the life of the Old Lady of Threadneedle Street as she approaches 313. But UK monetary policy frameworks have lived dangerously and died young. For them, ten years is good going. To mark the occasion the Treasury Committee has launched a special enquiry. An impressive weight of written evidence has already been published, including a detailed review by the Bank of England. Everyone agrees that the UK has experienced an unprecedented degree of economic stability over the past decade. The average rate of inflation has come down from nearly 10% in the seventies and eighties, to 2.5% since 1993, and the volatility of inflation has fallen very sharply. At the same time, output growth has been higher on average and less volatile.