those prices are less susceptible to the influence of monetary policy, and will soon be contributing around one percentage point to measured inflation. so prices set in the market sector of the economy will need to rise by only about 1 % a year if inflation is to meet the 2 % target. that is a tall order. but the monetary policy committee can respond flexibly by looking through the effects of administered prices as long as market - generated inflation pressures remain subdued. there are good reasons to suppose that a gentle recovery is underway. broad money growth, adjusted for transactions between financial intermediaries, is now rising at around 4½ % a year, a rate that should, if maintained, show up in a recovery during 2013. credit conditions have improved, and should improve further as the impact of the funding for lending scheme kicks in. mortgage rates have fallen, especially for high loan to value mortgages. big companies have large holdings of cash and ready access to capital markets. equity prices are nearly 10 % higher than last january. if the policy prescriptions i mentioned earlier were adopted, then confidence that we were moving in the right direction should translate into higher business and housing investment, and underpin the recovery. recent actions by central banks and governments in a number of industrialised countries have raised questions about the frameworks within which monetary policy is being conducted. in the uk, the inflation target was introduced almost 21 years ago, and it has now come of age. it would be sensible to review the arrangements for setting monetary policy. bis central bankers ’ speeches last october i reviewed the first two decades of experience with the inflation target. in that speech, i argued that there were times when a concern for financial stability might justify deviating from the inflation target, but that policies aimed directly at preventing too rapid an expansion of financial balance sheets, of the kind now available to the bank ’ s financial policy committee, might be a less costly way, in terms of lost output and employment, of achieving overall stability. and i also argued that price stability in the long run remained essential for economic success. that is why price stability is the central plank of the remit given to the mpc by the chancellor. the other part of the remit makes clear that we are not expected to pursue 2 % inflation in the short run whatever the cost – it recognises that attempting to hit the inflation target at all times may cause “ undesirable volatility in output ”. the remit overall has become known as “

flexible inflation targeting ”. it is a way of trading off output and inflation variability in the short run, while ensuring that inflation remains on track to return to the 2 % target. until the crisis, there appeared to be no real tension between hitting the inflation target and ensuring steady growth. more recently, we have had to make difficult choices. the mpc has looked through the impact of temporary external shocks and administered prices ( including changes to vat ) on the level of cpi inflation and focussed on the level of domestically generated inflation in the market sector. money wage increases have been low and stable. but cpi inflation has been above the 2 % target for a long period. should the mpc have taken action to bring inflation down? to do that would have meant driving down wages by creating a deeper recession, even higher unemployment and lasting damage to the job prospects of many young people. i know of no - one who has argued that the problem with the uk economy is that it has not had a sufficiently deep recession. inflation rose to over 5 % but has now come down to 2. 7 %, and the committee believes that it is likely to come back to the target over the next two years. in effect the mpc has allowed a longer inflation overshoot than usual in order to avoid pushing up unemployment. our current remit does not specify how the mpc should strike a balance between growth and inflation in the short run. the horizon over which inflation should come back to target is effectively delegated to the mpc. but should the mpc itself choose how quickly to bring inflation back to target, or should the government use its annual remit to set that horizon? is there a gain from trying to quantify how the mpc should manage the trade - off between growth and inflation in the short run? the recent guidance by the federal reserve about the conditions under which it would continue to hold interest rates at close to zero is a way of quantifying the “ flexibility ” in flexible inflation targeting. it describes how the federal reserve will interpret its freedom to balance its twin objectives for employment and inflation. how much discretion to give to the mpc and how much should remain with the chancellor is an interesting question that was raised, but not fully resolved, in 1997 with the system of open letters which gives the chancellor the opportunity to comment on the horizon over which the mpc plans to bring inflation back to target. so there are certainly aspects of the inflation targeting regime to consider. in assessing