mr george talks about monetary policy in the united kingdom : the economic prospect text of the chancellor ’ s lecture delivered by the governor of the bank of england, mr e a j george, at hertfordshire university on 18 / 02 / 99. as you would expect of a central banker i will talk about monetary policy – under the title of “ the economic prospect ”. i will begin by explaining what it is that we are trying to do through monetary policy ; then i ’ ll describe how we ’ ve been doing, where we are now, and where we might be headed. what we are trying to do so let me begin with what it is that we are trying to do. in one sense that ’ s very easy to explain these days. the previous conservative government had already in 1992 defined the objective of monetary policy in terms of a target rate for retail price inflation. the new labour government, immediately on assuming office, similarly defined the objective in terms of an inflation target, but went an important step further. as soon as gordon brown became chancellor of the exchequer, in may 1997, he announced that he would no longer exercise his powers to set short - term interest rates, which is the heart of monetary policy, but instead he would set the inflation target, and delegate the achievement of that target to a new monetary policy committee to be established in the bank of england. this position was subsequently formalised in the new bank of england act which came into effect in june of last year. that act now defines the bank ’ s objective as “ the maintenance of price stability, and, subject to that, to support the government ’ s economic policy, including its objectives for growth and employment ”. under the act the chancellor tells the bank what precisely we are to understand by “ price stability ” and he has done this by setting a target of 2½ % for a particular measure of retail price inflation ( rpix – which is the rpi excluding mortgage interest payments ) ; and although the act provides for the chancellor to set the target each year, the expectation is that it is in practice set for the medium to longer term. that is the political decision. the task of achieving that target – the technical implementation of monetary policy – is then delegated, transparently and accountably, to the mpc. the government no longer has the power – as it had under the 1946 bank of england act – to issue directions to the bank in the field of monetary policy, except, in the terms of the new

in a liquidation and can be affected by the role of supervisors in a liquidation. in order to realise financial collateral. but we do not yet have compatible bank resolution regimes, and some existing directives were designed without resolution in mind. we now have another chance. the basel committee on banking supervision has published an extensive review of impediments to the resolution of cross - border banks arising from national insolvency laws, resolution regimes, or supervisory practices. and the european commission has recently launched a consultation asking what changes to the european legislative framework are needed to address these issues. we need to focus on who should take what concrete actions. i think the fsb will be picking up that issue. resolution and support operations : who should pick up the tab? the second issue concerning resolution i want to say something about is the allocation of losses to creditors and to the official sector from support operations. the formal position varies between support for insured deposits and for other creditors. deposit insurance, and risk - based premia insured deposits are, of course, insured. it is often assumed that governments stand behind such schemes. but governments do not have pick up the final tab. such schemes are ultimately paid for by the banks themselves. whether schemes are funded or not, governments have a legal right to make recoveries from the residual banking industry over the succeeding years. there is, still, a question of the basis of the levy. this arises most clearly in a system which guarantees 100 % repayment up to some meaningful amount ( now £50, 000 in the uk ). while it has many merits, complete cover affects the dynamics of the market place in a potentially unhelpful way. it makes it easier for banks to pay up for deposits. the implied signal that a bank offering a high return would be taking greater risk than others, as it would have to, does not matter to the depositors. they are covered, and so are induced to place their money wherever they can achieve the best returns. that is a recipe for imprudent risk taking. one possible way of addressing it would be to make such risk - taking banks pay a higher levy into the insurance scheme. the bank of england thinks that this deserves serious consideration, and it is now the subject of debate in the uk. beyond deposit insurance : how can the industry bear the cost of rescues? during the current crisis, around the world governments have gone much further than protecting only insured depositors – uninsured