the case for broadening the goals of monetary policy would be strong. but i believe there are tools better suited to make the financial system more robust and i want to consider one of them – capital requirements – and how they might in future interact with monetary policy. more immediately, problems and fragilities in the banking sector remain and pose risks that the recovery in demand and activity we have seen across europe – including in the uk – falters. but in the uk we have also seen cpi inflation rise to a level that is significantly above the inflation target. in recent months cpi inflation has begun to fall, but remains well above the 2 % target level and that makes setting monetary policy difficult. we continue to face the problem of balancing risks : risks that inflation of 1. 0pp – 1. 5pp above target lasts long enough to become ingrained in expectations and affect behaviour so that it is hard to bring down, versus risks that the recovery in output becomes weaker and then disappears, leaving inflation pressures lower than is consistent with the target further ahead. since the financial crisis towards the end of 2008 economic policy has been unusually hard to manage. both monetary and fiscal policy have been exceptionally expansionary. there has been an extremely large fiscal deficit. fiscal policy is now being tightened. i look forward to the day when it will be appropriate to tighten monetary policy since a return to more normal levels of interest rates would be a welcome sign that economic conditions were also more normal. but i do not think that is where we are today. so since i joined the mpc just over a year ago i have not voted to increase interest rates – despite the fact that inflation has more often than not been above the target. but even though price rises over the past year have been running at relatively high levels, the underlying domestic inflationary pressures are not strong. wage rises – despite a move up in household inflation expectations – remain low. without a pick up in wage inflation i find it hard to think it at all likely that inflation being significantly above target is sustainable. of course wage pressures may build significantly over the next year or so, though i do not believe this is the most likely outcome. and risks of an extended period of low growth – which would further weaken those pressures – are real. in talking about the possibility of an extended period of low, or no, growth i may sound blase about inflation risks. but the point about risks is that more than one can exist. there are risks that inflation stays

david miles : monetary policy and financial stability speech by mr david miles, member of the monetary policy committee of the bank of england, at the bristol business forum, bristol, 14 july 2010. * * * i would like to thank conall maccoille and gilberto marcheggiano for research assistance and i am also grateful for helpful comments from other colleagues. the views expressed are my own and do not necessarily reflect those of the bank of england or other members of the monetary policy committee. monetary policy in the uk has never been as expansionary as it is today. just over 15 months ago the level of bank rate was reduced to what is – to all intents and purposes – its floor. as chart 1 rather starkly shows, this is the lowest level to which bank rate has fallen since the bank of england was established at the end of the seventeenth century. bank rate has not been changed for 16 consecutive meetings of the mpc. that is not so unusual. in fact, as the chart reveals, between 1720 and 1820 bank rate did not move from 5 %. had a monetary policy committee then met each month, as it does now, it would have decided at 1200 consecutive meetings not to change the level of interest rates. so it is far from unusual for the interest rate set by the bank to remain constant for over a year. and for much of the period since rates fell to the floor, policy has been actively changed – asset purchases have built up to now stand at around £200 billion. chart 1 bank rate from 1694 % so it is the level to which interest rates have fallen that is unprecedented. i believe it has been right to loosen aggressively the stance of monetary policy because of the scale of the deflationary and recessionary forces unleashed by the remarkably rapid downturn that followed the crisis in the banking sector. this crisis intensified dramatically in the autumn of 2008 when the banking system came close to total collapse. that would have been an outcome comparable in its impact to the failure of the system for electricity supply. many now argue that monetary policy should be set in a different way so as to reduce the chances of this sort of banking crisis. that is one of the issues i want to discuss today. the argument that the aims of monetary policy need to be broadened beyond a focus on inflation is one that deserves to be taken seriously because the damage done by extreme financial instability is great. if there were no tools better suited to help preserve financial stability than varying interest rates then