The UK’s financial sector can be both a global good and a national asset – if it is resilient. It is not for the Bank of England to decide how big the financial sector should be. Our job is to ensure that it is safe. The UK can host a large and expanding financial sector safely, if we implement a reform agenda that extends well beyond domestic banking. That is not to suggest that the focus on reforming domestic banks has been misplaced. Following the crisis, it was imperative to fix first the fault lines at the core of our system, with initiatives ranging from rebuilding the capital of major UK banks and building societies, to changing the structure of compensation and the responsibilities of senior officers. In tandem, some major banks are working to change their cultures.6 But reforms of domestic banking are far from sufficient for a global hub like London. Now is the time for a greater focus on what’s needed for resilient international banking and robust global markets. This will require sustained international engagement. Unlike in the early days of the FT, the UK can no longer dictate standards. Rather than ruling the waves, we must spur collective action through a demonstrated commitment to openness and the promotion of better ideas in Europe and at the G20 via the Financial Stability Board (FSB).
During the 1980s inflation averaged 7% a year, and it is only since the inflation target regime was adopted in late 1992 that inflation has returned to both low and stable levels. Britain tried most types of monetary regime: targeting monetary aggregates both narrow and broad; shadowing an exchange rate target, and an explicit exchange rate target through membership of the Exchange Rate Mechanism. None was pursued for long, and none carried real credibility. It was following our exit from the Exchange Rate Mechanism in 1992 that the opportunity arose to put in place a new monetary framework based on an explicit target for inflation and a floating exchange rate. The aim of the MPC is to keep both inflation and inflation expectations at the target level of 2½%. It is no small part of a central bank’s role to create confidence and credibility in the belief that it will respond to any change in economic circumstances in order to maintain a broad degree of economic stability. In the economists’ jargon, the public must believe that the central banks “policy reaction function” is consistent with stability, and if it is predictable, then announcements on interest rates should not come as news. The economic data will have led to expectations about the likely course of interest rates which, in most instances will prove a reasonable guide to the course of policy. A clear sign of the success of the MPC will be when we are no longer news.