Temporary price stabilisation would be accompanied by a destablisation of real economic activity. A similar dilemma is posed by VAT reduction, which stimulates the economy and lowers registered inflation. A monetary policy response in the form of a repo rate cut - to return inflation to the target - would act as a further economic stimulus. Here, too, temporary price stabilisation would be accompanied by a destablisation of real economic activity. I have used VAT adjustments here as an example of shocks from the supply side. Effects of the same type are associated with changes in other indirect taxes, for instance the current proposal to lower the tax on tobacco. The same applies to international oil price movements, as well as to the Riksbank’s own interest rate adjustments, which have a direct impact on house mortgage interest costs. How, then, should monetary policy deal with a situation in which prices are exposed to supply shocks of this kind? Part of the answer lies in the circumstance that - provided people’s medium or long-term inflation expectations remain unaffected - most shocks of this type are transitory. The Riksbank has concluded that in the normal course of events, transitory price effects of this type ought to be a secondary consideration in the construction of monetary policy in so far as they do not affect inflation expectations and thereby have a more permanent impact on inflation. Effects of supply-side shocks may, however, be more permanent.
Andrew G Haldane: The Bank and the banks Speech by Mr Andrew G Haldane, Executive Director, Financial Stability, Bank of England, at Queen’s University, Belfast, 18 October 2012. *  *  *  The views expressed within are not necessarily those of the Bank of England or the Financial Policy Committee. I would like to thank Bethany Blowers, Forrest Capie, John Keyworth, Victoria Kinahan, Emma Murphy, Varun Paul, Richard Roberts, and the staff of the Bank’s archives for their comments and contributions. In the light of the financial crisis, there is much to explain. Doing so is not just important for reasons of accountability to the public. Explaining and understanding errors of the past is absolutely essential if policymakers are to learn lessons for the future. To misquote someone none of you have ever heard of, those who forget the errors of the past are doomed to repeat them. During the course of its 318-year history, the Bank of England has had plenty of crisis experience. And encouragingly, on my reading of history, there is evidence of it having learnt from this experience. In response, radical reform of the Bank’s policymaking framework has been commonplace. There are few better examples than the radical reform of the Bank’s transparency and accountability practices over the past twenty-five years. Those reforms are continuing to the present day. A wholly new framework for financial stability policy is being put in place in the UK, perhaps the most radical in the Bank’s history.