paul tucker : a few remarks on current monetary policy in a rebalancing economy speech by mr paul tucker, deputy governor for financial stability at the bank of england, at the joint 1900 / city club lunch, london, 22 november 2011. * * * the outlook for economic activity has deteriorated over the past few months. the mpc has responded with a further round of quantitative easing to underpin demand, and so reduce the chance of inflation undershooting our target in the medium term. monetary credibility : accommodating the price level shocks our ability to provide and sustain that stimulus depends absolutely on the credibility of our commitment to the 2 % inflation target. if our credibility were to slip and medium - term inflation expectations were to rise, we would have to run with a tighter monetary stance than otherwise in order to put the genie back into the bottle. the committee ’ s most important judgment over the past year or so has, accordingly, been that the elevated rate of inflation, now about 5 %, is temporary. we have had conviction in that judgment because of the observable upward impulses to the price level from sterling ’ s depreciation, the vat increase, and the rise in commodity prices. there is occasionally a rather odd debate about whether the mpc could have avoided the consequent increase in inflation. big picture, the answer is that we could have done, but we chose not to. we have, in effect, accommodated something like half of the cumulative impulse to the price level. we could have chosen instead to offset the price level shocks by running a much tighter monetary policy. had we done so, spending in the economy, activity and employment would all have been squeezed. conditions have anyway been difficult for many households due to the squeeze on real incomes, but i think it would have been worse if we had tightened policy. our ability to sustain exceptional monetary stimulus has, i should reiterate, depended on the credibility of our commitment to low inflation over the medium term being preserved. i worried that chatter in the markets in late 2010 / early 2011 marked incipient signs of fragility in that credibility. that was one of the reasons why, at the beginning of this year, i had expected to vote for an increase in bank rate at our february meeting. the weak output data for q4 2010 published shortly before that meeting changed my mind, and the committee ’ s course, as they revealed that the economy was softer than i had thought. escape

importance of the eurozone as far and away our major trading partner, the weakness of the euro, in this case more specifically its weakness against sterling, also, of course, complicates our own monetary policy task in the uk. looking at the aggregate economic data the uk has had a rather good run now for the past seven or eight years. we have grown fairly steadily quarter by quarter at an average annual rate over that period of some 2¾ %, which is well above our longer term trend rate - usually estimated at around 2¼ %. employment has risen steadily so that the number of people employed is the highest on record. and the rate of unemployment is as low as it has been for about twenty years. meanwhile inflation on our inflation target measure has also averaged some 2¾ % over the past seven or eight years. helped by the dampening effect on uk inflation of the weakness of the euro against sterling, we have been below the 2½ % target now for the past year and a half, and currently - on the standard hicp measure - we have the lowest rate of inflation in europe at around 1 %. our problem in the uk is the imbalance within the overall economy between those sectors that are competing with producers in the eurozone, who are under considerable pressure, and the rest of the economy, which is doing relatively well. believe me, we are very conscious of the desirability of exchange rate stability with our partners in the single market - even though we recognise that membership of the euro provides only nominal, rather than real, exchange rate certainty, and is, of course, limited to the eurozone. why then do we hesitate? the answer - in terms of the economics of the euro - it seems to me - and here i differ from jean - claude - is quite straightforward - not a bit paradoxical or bizarre! it is because to join the euro we would have to live with the single monetary policy. it may be that in time we could expect to do so relatively comfortably. but had we joined at the outset the presumption must be that over the past two years we would have lived with both a lower exchange rate and lower interest rates during a period when we have in any case been operating close to productive capacity and growing at above trend. the likelihood therefore is that we would then have experienced something of an inflationary boom - as they have, for example, in ireland though i am not sure one can generalise from the irish experience.