of maximum “ go ”, and heavy braking. this is a reading of the framework we do not share. there is a range of settings of the instrument between “ maximum go ” and “ heavy braking ”. most of the time we would expect interest rates to be in that range. let us look at two possible situations where monetary policy should be changed : • the first is when inflation is above the target. in this situation, the inflation targeting framework would say to raise interest rates to a setting which would bring inflation back to the target. but once the higher rates had done their job, they should be gradually reduced to more normal levels. this is what happened in 1996. we did not wait until our forecast had inflation falling below 2 % before we started to ease. • the second is when inflation is below the target. in this case, the framework would call for a setting of interest rates which would, over time, allow inflation to go back up to the target. once it is clear that such a setting had done its job, the framework calls for it to be replaced by one more likely to keep inflation at the target. the framework does not envisage the policy setting being maintained until something goes wrong. now some may object that all this smacks of fine tuning. i agree that we should not delude ourselves that the economy can be precisely controlled so that inflation stays within or close to the band, even when there are no external shocks. the point remains, however, that even if the process is not precise, the instrument does not remain at its most extreme setting once that is no longer needed. as the outlook changes, and as the balance of risks shifts, it is appropriate also for the policy instrument to shift. 3. what about the gst? some people have not been convinced by the arguments i have used above. some still cannot understand why you would tighten unless the economy was overheating, and assume that there must be a hidden agenda. others are keen to play the old game of trying to find a political dimension to monetary policy. this has led some people to say that the real reason is our fear of the inflationary effects of the gst, but that we are too diplomatic to say so. i am sorry to disappoint the proponents of this view, but that is not the case. • if the gst was the reason for tightening monetary policy, why have the fed, the bank of england and the ecb tightened monetary policy?

( as in 1994 ). as a description of the economy, that assessment was essentially correct, and we have no desire to dispute it. but the implication for policy which was drawn from this assessment was not, in our view, correct. in our view, it reflected a rather dated approach to the application of monetary policy. the traditional view is that you only begin to tighten monetary policy when things have become, or clearly will become, overheated or, in other words, out of control. the tightening in those circumstances is a sign that something has gone wrong and is, in effect, an admission of policy failure. hence, the ample scope it provides for criticism, particularly in the political arena. the unusual aspect of the recent tightening is that it occurred before things had become, or were about to become, out of control. if it is successful, it will mean that they do not get out of control in the foreseeable future. that is what is meant by the term “ pre - emptive ”. but clearly we could not have just picked any period when the economy was performing well and chosen to tighten monetary policy and claimed it was done in order to be pre - emptive. there had to be good reasons why it was now - in the final quarter of 1999 - that we made this decision. although we have explained this in our semi - annual statement, i would like to spell out a couple of aspects of this in the time remaining tonight. 1. the international aspect although it is only a year ago, most of us have forgotten how gloomy the prospects seemed in the second half of 1998. this was the time when the asian problems had spread via russia and latin america to wall street itself. if you look back at the press release which accompanied our easing of monetary policy in december 1998, you will see it referred to the expectation by official and private forecasters that 1999 would be a worse year than 1998. as we now know, the world did not turn out that way - 1999 has turned out to be a stronger year than 1998, and both official and private forecasters are now expecting 2000 to be stronger again. i do not wish to quibble with this assessment. i merely wish to record that from about the middle of 1999, markets around the world began to recognise that the accommodative stance of monetary policy by major central banks that had been so appropriate for 1998 and early 1999 was starting to look less appropriate as 1999 progressed and strengthened. this