It is our duty to do so because the effectiveness of each function influences that of the others. In other words, we have to maximise our impact by working together. BIS central bankers’ speeches  3  That imperative is the core of our new strategic plan which stresses that our contribution to the public good will be greatest if we work as One Bank. Complementarities might be operational, arising when putting two functions together is more efficient by allowing faster decision making in a crisis, improving the coherence of communication, or taking advantage of the common skills, information or analyses required to operate the policies.6 Or they might be economic, arising when there are strong interactions in the way the policies have their effect, or when one policy affects another. It then makes more sense to have them operated by one institution so that shared analysis and information leads to consistency of decision making and so that trade-offs between objectives can be managed effectively, and in a timely manner, to achieve better outcomes. There are strong complementarities between all four of the core functions of the Bank: monetary policy, markets, macroprudential policy and microprudential regulation.7 Each affects overall monetary and financial conditions and therefore has the capacity to affect the achievement of both monetary and financial stability. They in turn help maintain confidence in the currency, which we also support by issuing high-quality banknotes that people can use with confidence.
That tension between monetary and financial stability is best managed in a coordinated way in a single institution. The use of macroprudential tools can decrease the need for monetary policy to be diverted from managing the business cycle towards managing the credit cycle. This enhances the credibility of the inflation target. That in turn may reduce the need for sharp or persistent moves in interest rates, which themselves might threaten financial stability. Similarly, macroprudential policy can more effectively focus on its primary goal of systemic stability by recognising that, while it affects the economic cycle, it is not suited to managing it. Instead its effects on the economic cycle should – like fiscal policy – be taken into account in setting monetary policy, which is the primary and most effective tool of demand management. Taken together with the synergies from sharing information and analysis, these are strong arguments for operating monetary policy and prudential policy in the same institution. In the short time the Bank has been responsible for both, we have already seen the benefits of operating them in a coordinated way. For example, our forward guidance framework for monetary policy reflects a clear division of responsibilities. Although monetary policy has an important role to play in mitigating financial stability risks, it does so only as a last line of defence. This is important because vulnerabilities can emerge from a long period of unusually low interest rates, as complacency sets in about the future path of policy and asset prices.