) over the period indicated. data up to 2002 q2. source : bank of england calculations based on ons data. it is, of course, difficult to identify the effect of changes in the monetary policy regime on the path of total output. one approach is to consider long runs of data which make it easier to identify structural breaks in the behaviour of output. luca benati of the bank of england has been investigating the statistical properties of inflation over long periods for a number of countries. he finds that changes in the behaviour of inflation appear broadly to coincide with changes in the monetary policy regime. some tentative evidence that this general conclusion applies to the uk can be found in the behaviour of ten - year forward interest rates on uk government bonds. at this horizon, high and variable interest rates are signs of high expected inflation and a large inflation risk premium. as shown in chart 3, the ten - year forward interest rate has fallen significantly in recent years, and has been less variable since inflation targeting, and especially the mpc, were introduced. what is the mechanism by which monetary policy contributes to a more stable economy? i would argue that monetary policy is now more systematic and predictable than before. inflation expectations are anchored to the 2. 5 % target. businesses and families expect that monetary policy will react to offset shocks that are likely to drive inflation away from target. in the jargon of economists, the “ policy reaction function ” of the bank of england is more stable and predictable than was the case before inflation targeting, and easier to understand. more simply, monetary policy is not adding to the volatility of the economy in a way that it did in earlier decades. the behaviour of monetary policy in the united kingdom after 1992 more closely resembles a “ taylor rule ” that has been shown to fit data in the united states than was the case before 1992. see the work of ed nelson of the bank of england ( nelson 2000 ). chart 3 ten year forward rates in the uk 1970 - 2002 note : implied forward nominal rates on conventional gilts ten years hence, calculated on the last business day of the month. source : bank of england. 3. the case for price stability : what have we learnt over the past 10 years? the costs of departing from price stability - either inflation or deflation - depend upon whether it is expected or comes as a surprise. in his 1992 lecture, lord kingsdown distinguished three costs of unanticipated inflation and four of anticipated inflation. i shall focus

layoffs soar. * more jobs go as recession looms. * jobless up as world pain hits britain. and the facts? at the time these headlines were written, the unemployment rate, both nationally and in virtually every region of the uk, apart from the south east and east anglia, was the lowest it has been since at least the early 1980s. i could go on. headlines : uk heads for credit crisis. closed for credit. credit card sales dive. facts : bank and building society lending up by 0. 7 % in the latest month ( september ) and by 8. 8 % over the past year. credit card lending was up by over 26 % on a year ago. headlines : house prices hit as recession clouds gather. facts : house prices rose by 6. 7 % over the past year on the halifax index and by 7. 5 % according to the nationwide. now i say all this, president, not to draw attention to the proclivity of headline writers, and some economic / financial commentators, to sensationalise. my serious point is that, especially at a time of unusual uncertainty as at present, we all need to focus more carefully than ever on the evolving facts, and on the more probable outcomes and not allow ourselves to become preoccupied with extreme, even if possible, outcomes. against that background, let me offer you my own assessment of where the uk economy has come from and where it is headed. since the recession of the early 1990s the economy as a whole has, as i say, grown at an average annual rate of just over 3 % - well above trend. during this period we were steadily reabsorbing the spare capacity created by the recession, and this was reflected in a gradual improvement in the labour market - in a net increase in employment of 1. 7 mn people since the end of 1992, and in a persistent fall in unemployment to - as i say - the lowest rate for nearly 20 years. meanwhile, underlying consumer price inflation has averaged 2. 7 % over the past 5 years, the lowest rate since the early 1960s - and it has been exactly on target - at 2½ % - in each of the past 3 months. about 2 years ago it began to become evident that demand and output growth, in the economy as a whole, was picking up speed. and as we moved into and through 1997, it became increasingly obvious that unless we acted to tighten monetary policy, in order to moderate the rate of growth, we