mervyn king : the international monetary system speech by mr mervyn king, governor of the bank of england, at the “ advancing enterprise 2005 ” conference, london, 4 february 2005. * * * later today the g - 7 finance ministers and central bank governors meet in london. markets are speculating on what the communique will or will not say about exchange rates. on such matters a private exchange of views might serve us rather better than a public statement. what is a matter for public discussion, however, is the mix of exchange rate regimes we see in the world today, and the consequences for international monetary stability. the current international monetary system comprises three large currency blocs : the dollar, the euro, and an asian bloc of currencies that are to varying degrees fixed against the dollar. these blocs, of broadly comparable size, produce more than twothirds of world output in total. given their size, the choice of exchange rate regime of one bloc has a significant effect on the options available to the others. countries have always faced constraints in choosing their exchange rate regime. any country can have only two out of the following three – an independent monetary policy, a fixed exchange rate and an open capital account. at various times countries have tried – and failed – to have all three. but in a world of large currency blocs decisions about exchange rate policies are interdependent. a monetary stimulus in the us will have a different effect on the euro area if, say, asian countries have flexible exchange rates rather than fixed rates against the dollar. so the choice of exchange rate regime by any one bloc both depends on and affects the choices of the others. how did we end up in this position? under the gold standard of the late 19th and early 20th century, exchange rates were fixed and capital flowed freely internationally. domestic monetary policy was subordinated to the demands of the gold standard, except in time of extreme crisis when the need for flexibility overcame the desire to adhere to the standard. from the end of the second world war until 1971, the member countries of the bretton woods system had a formal commitment to fixed but adjustable exchange rates, and capital accounts were largely closed to give members the flexibility to operate independent monetary policies. since the breakdown of the bretton woods arrangements, countries have been free to make quite different choices of exchange rate regime, and have not hesitated to do so. as international financial markets have developed, there has been a general movement to flexible exchange rates supported

cent of items in the consumer price index ( cpi ) were recording price rises of more than 3 per cent per annum. so, the problem has been a broad - based one. this is why the board is focused on bringing inflation down. the board understands that the rise in interest rates has put additional pressure on the households that have mortgages. but the alternative of lower interest rates and high inflation for a prolonged 1 / 5 bis - central bankers'speeches period would be even worse for these households, as well as all the households without mortgages. it would also make it more likely that inflation expectations would adjust upwards. and if this were to happen, it would be much more costly to address, involving high inflation for longer and even higher interest rates and a larger rise in unemployment to bring it down. recent developments in inflation are encouraging. since peaking at 7. 8 per cent in the december quarter of 2022, inflation declined to 4. 1 percent at the end of 2023. nevertheless, inflation is still too high. as you know, since the early 1990s the board has had a target for annual consumer price inflation of between 2 and 3 per cent on average over time. the new statement on the conduct of monetary policy endorses this but makes it more explicit that we should be aiming for the middle of the range – 2. 5 per cent. so, we have some way to go to meet our target. i should add here that we are not unique in experiencing a period of above - target inflation. inflation has been a challenge in most economies around the world – particularly those with which we typically compare ourselves. at least initially, this was a result of global supply chain issues coupled with strong demand for goods and rising energy prices. this saw inflation around the world rise to rates not experienced for many years, if not decades. as these influences have subsided, global inflation has eased and there has been encouraging progress towards central banks'targets. but services sector inflation remains high in many countries, partly reflecting demand remaining above supply and the associated tightness in labour markets. on tuesday, we released our updated forecasts for the economy and inflation. these forecasts have inflation returning to within the top of the target range – 3 per cent – in 2025 and to reach the midpoint of the target range in 2026. importantly, these forecasts are conditioned on the assumption that inflation expectations remain anchored around the midpoint of the target range. furthermore, these are our central forecasts and