we are likely to see some combination of stronger consumption growth and higher medium term inflation. this scenario, which i see as quite likely, would reinforce the case for raising uk interest rates to head off inflationary pressures. economic growth and uk monetary policy the uk ’ s monetary policy framework is focussed on the objective of price stability, which is currently defined in terms of a 2 % target for cpi inflation. there are good reasons why we have made the achievement of price stability the centrepiece of monetary policy here in the uk, and why many other countries follow the same approach. while monetary policy can affect the growth rate of the economy in the short term, over the medium to long term, economic growth is driven by supply side factors – enterprise, innovation, investment and skills. attempts to boost growth solely by loose monetary policy policies – which we experienced in the 1970s and the late 1980s – ended up creating greater economic instability and almost certainly hampered longer - term growth prospects. the best contribution that monetary policy can make to supporting the underlying forces of growth is therefore by fostering a climate of stability – primarily in terms of the level of prices but also by seeking to promote a relatively stable demand climate and by avoiding potentially destabilising lurches in policy. as i have already noted, the need to stabilise the uk economy in the face of a massive global financial shock in late 2008 and early 2009 fully justified the large cuts in bank rate and the injections of quantitative easing that the mpc made at that time. but now the economy is growing again and inflation is running persistently above the 2 % target, such a large degree of monetary stimulus is no longer appropriate and is in danger of creating more instability in growth and inflation, rather than stabilising the economy as monetary policy should. one justification which is frequently used for maintaining current monetary policy settings is the “ output gap ” model of the inflation process. according to this view of the world, stabilising growth and keeping inflation on target are two sides of the same coin. weak growth builds up a margin of spare capacity which then pushes down on inflation, whereas strong growth is more likely to be associated with above capacity working and a build - up of inflationary pressures. the uk economy appeared to conform to this model for the first decade of the mpc, but recently it has broken down and is no longer acting as a reliable guide to policysetting. bis central bankers ’ speeches in a speech last month, i set out

, massive policy errors, ” particularly the over reliance on free markets, ( p. 6 ). see c. m. reinhart and v. r. reinhart, “ after the fall, ” macroeconomic challenges : the decade ahead, federal reserve bank of kansas city 2010 economic policy symposium. available at : < http : / / www. kansascityfed. org / publicat / sympos / 2010 / reinhart - paper. pdf >. bis central bankers ’ speeches unlikely to return to its pre - crisis level of gdp until a full five years after the start of its last recession ( chart 7 ). managing the deleveraging process austerity is a necessary condition for rebalancing, but it is seldom sufficient. there are really only three options to reduce debt : restructuring, inflation and growth. whether we like it or not, debt restructuring may happen. if it is to be done, it is best done quickly. policy - makers need to be careful about delaying the inevitable and merely funding the private exit. historically, as an alternative to restructuring, financial repression has been used to achieve negative real interest rates and gradual sovereign deleveraging. bis central bankers ’ speeches some have suggested that higher inflation may be a way out from the burden of excessive debt. 9 this is a siren call. moving opportunistically to a higher inflation target would risk unmooring inflation expectations and destroying the hard - won gains of price stability. similarly, strategies such as nominal gdp level targeting would fail unless they are well understood by the public and the central bank is highly credible. 10, 11 with no easy way out, the basic challenge for central banks is to maintain price stability in order to help sustain nominal aggregate demand during the period of real adjustment. in the bank ’ s view, that is best accomplished through a flexible inflation - targeting framework, applied symmetrically, to guard against both higher inflation and the possibility of deflation. the most palatable strategy to reduce debt is to increase growth. in today ’ s reality, the hurdles are significant. once leverage is high in one sector or region, it is very hard to reduce it without at least temporarily increasing it elsewhere. in recent years, large fiscal expansions in the crisis economies have helped to sustain aggregate demand in the face of private deleveraging ( chart 8 ). however, the window for such augustinian policy is rapidly closing. few except the united states, by dint of its reserve currency status