, it was recognised widely in the central bank community that such exit would pose challenges for the design, implementation and communication of monetary policy. 3. moreover, the large portfolio of asset purchases accumulated as a result of qe has been run down in parallel with the rise in bank rate. since march 2022, the bank of england has ceased to reinvest the proceeds of maturing bonds held in its asset purchase facility ( apf ) used to house the qe portfolio. as of november 2022, the bank has sold gilts from the apf to the market. corporate bond holdings in the apf have been reduced by similar means. 4. the concept of a ‘ neutral ’ balance sheet remains even more elusive than that of a ‘ neutral ’ interest rate at both empirical and conceptual levels, so i focus on the interest rate dimension here. 5. in communications on the level of the neutral real interest rate that pre - date my membership of the mpc, a distinction has been drawn between ‘ capital r - star ’ – a low frequency concept, which ‘ looks through ’ the impact of short - term economic shocks – and ‘ little r - star ’ – a higher frequency concept, which is influenced by shocks. 6. in the recent past, the mpc has assumed trend real gdp growth in the uk of around 1½ % pa, albeit with the year - toyear evolution of potential gdp more modest in recent years owing to a series of adverse supply developments associated with inter alia brexit and the covid pandemic. supply trends are of course uncertain and regularly reviewed by the mpc. an updated mpc assessment of those trends is scheduled to be published as part of its february 2023 monetary policy report. 7. by the same token, other countries – notably the us – that are net exporters of natural gas ( typically in liquefied form as lng ) have seen a substantial, mirror image improvement in their terms of trade. on this dimension, developments in most western europe countries ( including the uk ) are therefore quite different from those in the us. 8. abstracting from monetary policy, the textbook optimal response to a ( real ) terms of trade shock would be to switch the composition of demand away from domestic to external sources while sustaining aggregate demand at levels consistent with the full utilisation of available resources, i. e. an ‘ expenditure switching ’ rather than ‘ expenditure reducing ’ response, typically associated with real depreciation. implicit

five years from now, i am confident that one of my successors will be able to look back and explain in his or her mais lecture the great improvements that took place between 2005 and 2030. but i like to think that the inflation target framework has the ability to serve us well over that period. thirty years ago the theory of monetary policy was ahead of its practice, at least in the united kingdom. now i hope that the practice has given the theorists something to think about. table 1 : inflation targeting countries country new zealand chile canada israel u. k. sweden finland australia spain czech republic korea poland mexico brazil colombia south africa thailand iceland norway hungary peru philippines adoption of inflation targeting dec. 1989 jan. 1991 feb. 1991 jan. 1992 oct. 1992 jan. 1993 feb. 1993 mar. 1993 jan. 1995 apr. 1998 apr. 1998 oct. 1998 jan. 1999 jun. 1999 sep. 1999 feb. 2000 may 2000 mar. 2001 mar. 2001 july 2001 jan. 2002 jan. 2002 source : truman, edwin ( 2003 ), inflation targeting in the world economy, institute for international economics, washington dc. the table not only includes current inflation targeting countries, but also spain and finland, which have since joined emu. chart 1 : the maradona theory of interest rates in 2002 feb ir per cent may ir aug ir nov ir note : the black line represents the bank of england official interest rate. the coloured lines represent the market ’ s expectations of future interest rates, as calculated in each of the four inflation reports published in 2002. chart 2 : inflation and unemployment 1993 - 2005 rpix inflation ( % ) - 5 une mployme nt ( % ) source : ons. note : the unemployment rate used here is the claimant count measure. chart 3 : inflation and unemployment by decade rpix inflation ( % ) 1950 - 1959 rpix inflation ( % ) 1960 - 1969 - 5 une mployme nt ( % ) 1970 - 1979 - 5 rpix inflation ( % ) une mployme nt ( % ) rpix inflation ( % ) 1980 - 1992 - 5 une mployme nt ( % ) - 5 une mployme nt ( % ) rpix inflation ( % ) 1993 - 2005 - 5 une mployme nt ( % ) note : the unemployment rate used here is the claimant count measure, published by the ons from 1971. unemployment data before 1971 is from haldane and quah ( 1998