flexible inflation targeting ”. it is a way of trading off output and inflation variability in the short run, while ensuring that inflation remains on track to return to the 2 % target. until the crisis, there appeared to be no real tension between hitting the inflation target and ensuring steady growth. more recently, we have had to make difficult choices. the mpc has looked through the impact of temporary external shocks and administered prices ( including changes to vat ) on the level of cpi inflation and focussed on the level of domestically generated inflation in the market sector. money wage increases have been low and stable. but cpi inflation has been above the 2 % target for a long period. should the mpc have taken action to bring inflation down? to do that would have meant driving down wages by creating a deeper recession, even higher unemployment and lasting damage to the job prospects of many young people. i know of no - one who has argued that the problem with the uk economy is that it has not had a sufficiently deep recession. inflation rose to over 5 % but has now come down to 2. 7 %, and the committee believes that it is likely to come back to the target over the next two years. in effect the mpc has allowed a longer inflation overshoot than usual in order to avoid pushing up unemployment. our current remit does not specify how the mpc should strike a balance between growth and inflation in the short run. the horizon over which inflation should come back to target is effectively delegated to the mpc. but should the mpc itself choose how quickly to bring inflation back to target, or should the government use its annual remit to set that horizon? is there a gain from trying to quantify how the mpc should manage the trade - off between growth and inflation in the short run? the recent guidance by the federal reserve about the conditions under which it would continue to hold interest rates at close to zero is a way of quantifying the “ flexibility ” in flexible inflation targeting. it describes how the federal reserve will interpret its freedom to balance its twin objectives for employment and inflation. how much discretion to give to the mpc and how much should remain with the chancellor is an interesting question that was raised, but not fully resolved, in 1997 with the system of open letters which gives the chancellor the opportunity to comment on the horizon over which the mpc plans to bring inflation back to target. so there are certainly aspects of the inflation targeting regime to consider. in assessing

sterling and other uk asset prices in our projections have therefore become increasingly inconsistent with the smooth brexit assumption in the mpc ’ s projection. that doesn ’ t mean that the market is wrong or that the mpc is right about the likely outcome of the negotiations. it just highlights the extent to which the levels of interest rates, sterling and other asset prices might increase if a deal were reached. the mpc will explore how to best illustrate these sensitivities as we update our projections for the august inflation report. all speeches are available online at www. bankofengland. co. uk / news / speeches we will also make a detailed assessment of the potential implications of the global sea change currently underway. as i have sought to illustrate, whether current trade tensions shipwreck the global economy or prove to be a tempest in a teacup will have an important influence on the outlook for growth and inflation in the uk. however trade tensions evolve and the brexit process unfolds, uk monetary policy will remain guided by the constancy of the inflation target. the mpc will respond to any material change in the outlook, adjusting policy in either direction, as required to bring inflation sustainably back to the 2 % target while supporting jobs and activity during this most important transition for the people of the united kingdom. all speeches are available online at www. bankofengland. co. uk / news / speeches annex : expected paths of policy rates shifted sharply downwards united states 5 may 2019 per cent 3. 00 2. 75 2. 50 2. 25 2. 00 1. 75 dashed lines : 1 year forward rates solid lines : 3 year forward rates 1. 50 1. 25 jul. 18 oct. 18 jan. 19 apr. 19 euro area 5 may 2019 per cent 0. 50 0. 25 0. 00 - 0. 25 dashed lines : 1 year forward rates solid lines : 3 year forward rates - 0. 50 - 0. 75 jul. 18 oct. 18 jan. 19 apr. 19 united kingdom 5 may 2019 per cent 1. 50 1. 25 1. 00 0. 75 dashed lines : 1 year forward rates solid lines : 3 year forward rates 0. 50 jul. 18 oct. 18 jan. 19 apr. 19 all speeches are available online at www. bankofengland. co. uk / news / speeches