In a changeable economic environment, in which these things may not be so easy to infer directly, it may also want to say more about its potential reaction to such outcomes (its “reaction function”). Expectations of future interest rates affect current demand and policymakers clearly have an interest in their behaving appropriately as economic news comes in. There are various ways of doing that – speeches, simulations, perhaps even published rate paths. But whatever the medium monetary authorities need always to think that the message – not least the point that future policy will depend on how the outlook for inflation evolves – is well understood. I’ve received helpful comments from colleagues at the Bank of England. I’d like to thank Jack Meaning, Alberto Polo and Tuli Saha for their help in preparing the speech. Particular thanks are due to Fabrizio Cadamagnani and to Rich Harrison, who ran the simulations for Charts 46 and wrote the appendix. The views expressed are my own and do not necessarily reflect those of the Bank of England or other members of the Financial Policy Committee or the Monetary Policy Committee. 1. I’ve chosen the former because it’s smoother than the actual interest rate, and the latter because it’s a monthly rather than quarterly series 2. King (2005), ‘Monetary policy: practice ahead of theory’. 3. Broadbent (2013), ‘Conditional guidance as a response to supply uncertainty’. 4. See Krugman (1999), ‘It’s Baaack: Japan’s Slump and the Return of the Liquidity Trap.’ Brookings Papers on Economic Activity, no. 2: 137–87. 5.

This explains why I was pleased to accept to participate in this conference, whose purpose is indeed to take stock of what has been achieved since Malta joined the EU in 2004 and, more importantly, to reflect on what still remains to be done. Where have we come from? In order to appreciate the nature of the challenge that membership implied, it is first necessary to recall where we were coming from. Suffice it to point out that the European Commission’s response in 1993 to Malta’s application had been highly critical. It concluded that, “The adoption of the acquis communautaire … depends on a thoroughgoing overhaul of the Maltese economy’s regulatory and operational systems.” The first steps in the reform process were taken in the mid-1990s. These included the liberalisation of the financial system and of the import tariff regime, the gradual easing of exchange controls, the partial deregulation of interest rates and the introduction of value added tax and of lower direct taxes. When the membership application was reactivated in 1998, however, the economy still needed significant restructuring. Further reforms were, therefore, launched once accession negotiations commenced in 1999, including a further dismantling of trade restrictions and the privatisation of State-owned enterprises. This, however, was still not enough. The vulnerability of the Maltese economy was exposed in 2001 by the mounting competitive pressures from emerging economies and by two major external shocks, the bursting of the dot.com bubble and the events of 9/11, which together had an adverse impact on the manufacturing and tourism sectors.