The best we can probably aspire to is directing monetary policies to achieving domestic price stability in a sensible manner and seeking to communicate our policy intentions as clearly as possible. Let me finish with a few words on the exit from unconventional monetary policies. While it may still be a way off, we know it will come eventually. And the recent market volatility prompted by heightened expectations of imminent tapering in the rate of asset purchases by the Federal Reserve has provided a salient reminder that it may not be smooth. Moreover, although the adoption of accommodative policies was synchronised across the advanced economies, the heterogeneous nature of the recovery, with the United States leading the way and Europe bringing up the rear, means that exit is unlikely to be synchronised, which will complicate matters. The international spillovers mentioned earlier can obviously be expected to operate in reverse on exit. And indeed, we have just seen such synchronised increases in long-term sovereign bond yields internationally, together with capital outflows from emerging economies and associated downward pressure on their currencies. But for these countries, the greatest danger during exit will probably lie in the risk of future financial sector disruption if outflows expose currency mismatches on bank and corporate balance sheets. For advanced economies, particularly those lagging behind on the road to exit, there is a risk that market participants see tightening moves in, say, the United States as indicating that tightening is imminent elsewhere.

While such a timeinconsistent policy may be desirable in theory, in an individualistic committee like ours, with a regular turnover of members, it is not possible to implement a mechanism that would credibly bind future members in the manner required. Nevertheless, by reducing uncertainty about our behaviour, we are aiming to encourage households and businesses to spend and invest. The knowledge that monetary policy will not be tightened until the UK’s fledgling recovery is secured should boost confidence. Moreover, it should reduce the likelihood that the present expansionary monetary stance is withdrawn prematurely through an upward movement in market interest rates. Short-term yields have moved up since our announcement on a string of good news about the economy, but the unemployment threshold, by serving as a reminder of just how much growth is needed to regain lost ground, should temper the extent of any tightening. Indeed, for that reason, guidance is potentially more valuable during exit than during entry. Finally, given the uncertainty about the causes and durability of the recent exceptional weakness in UK productivity growth, it also provides a robust framework within which to test the scope for economic expansion without jeopardising price or financial stability. While guidance – and good central bank communication more generally – will be important during exit, I doubt very much that good central bank communications alone can ensure that it will be completely smooth. When a central bank’s reaction function is not well understood, market interest rates tend to respond to policymakers’ actions in response to economic data.