that affects the way they behave when they take decisions about wages and prices. the less helpful legacy is that even a small movement in inflation away from target – one percentage point – has prompted some highly coloured media coverage, and may have unsettled people ’ s expectations about where inflation is headed in the short run. how does this less helpful legacy affect the policy debate? remembering the earlier discussion of constrained discretion, a temporary spike in inflation, as a result of a large cost shock like the recent rise in energy prices, is exactly the sort of shock to which policy - makers should be able to react flexibly within an inflation targeting framework. that enables them to avoid excessive volatility in output and employment, as long as public expectations of inflation over the medium term remain pegged to the inflation target. on the other hand, the mpc can never afford to ignore evidence that medium - term inflation expectations are becoming dislodged : anchoring these expectations is fundamental to the success of the framework. but direct evidence of inflation expectations is very hard to come by ; the measures we have are patchy and poor. so there is a difficult dilemma here, which the mpc has been grappling with over the past few months. and it has left me with a nagging worry. my concern is this. if the price of maintaining the public ’ s confidence is that we have to try to keep inflation within a whisker of the target at all times – even in the face very large shocks – the flexibility that is such an important feature of our present arrangements may get significantly eroded 7. that is why the open letter procedure remains important – and why it is a great pity that it has been widely misrepresented as a punishment, rather than as an opportunity for the mpc to explain itself. our monetary policy framework can only offer flexibility as long as it remains credible. but our credibility needs to reflect reality. it is important that the unprecedented stability of the past decade does not lead people to believe that central banks can walk on water. they can ’ t. when that becomes clear – as at some stage it will – i see some risk that people will be excessively disillusioned. so let me end by being very clear about what i regard as reality. the mpc cannot keep inflation exactly on target, at all times and in all circumstances. large price shocks will sometimes drive us away from target, and we need to be able use our judgement in deciding how

to react. but we can and will keep inflation close to target on average. short run deviations from the target should not leave anyone in any doubt about that. conclusions the stability of the period since 1992 has been almost as unexpected as the falling of the berlin wall, and every bit as welcome. it remains something of a puzzle and we cannot assume it will continue indefinitely. we do not know quite how big a part the mpc has played in achieving this outcome. but it has certainly been shaped by it. success – however earned – has its price. it may have bred expectations of the mpc and what monetary policy can deliver which are frankly unrealistic – and unsustainable in the longer term. in the original concept, the defining characteristic of inflation targeting and the mpc was the scope it offered for exercising constrained discretion. we need to hang on to that big idea. i would have a similar concern if people came to believe that the mpc could keep output growing steadily, quarter by quarter, irrespective of wider economic circumstances.