mervyn king : a governor looks back – and forward speech by mr mervyn king, governor of the bank of england, at the lord mayor ’ s banquet for bankers and merchants of the city of london, london, 19 june 2013. * * * my lord mayor, ladies and gentlemen : chancellor : thank you for those generous words. it has been a privilege to work with you over the past three years, a period of great change both at home and abroad. your support for the bank has been much appreciated at this end of town, and you have changed for the better the regulatory framework that oversees the city. but we both know that the past few years would have been much more difficult without the continual support of two people. and i am so pleased that both frances and barbara are with us tonight. and i ’ m particularly happy, george, that neither you nor i have to speak after either of them because experience suggests that we would suffer from the comparison. lord mayor : let me thank you too for presiding over my final mansion house dinner. we have enjoyed many musical evenings together, and barbara and i look forward to sharing many more with you and clare after you shed the chains of office later this year. the city has been extremely fortunate to benefit from your energy, drive and can - do attitude as lord mayor. i shall not detain you this evening with a retrospective examination of my time as governor. suffice it to say that it was a game of two halves. and, far from a boring goalless draw, it turned out to be a rather exciting and dramatic game, full of incident, with a red card or two and a passionate and at times justifiably angry crowd. we shall have to wait for the historians of tomorrow to file the full match report. instead, tonight i want to focus on the twin challenges of engineering a recovery and reforming the financial system. i want to look back on the huge amount that has been done, and look forward to the unfinished business on both fronts, much of it for the bank of england. i shall also tell you a story about the governor of the bank of england, the governor of the bank of canada and a certain mr osborne. but that comes later. since 2008, the bank ’ s monetary policy committee has gone to extraordinary lengths to stabilise the economy and support growth and employment. in fact, we have pursued what i have called the “ paradox of policy ” : doing in the short run,

interest rates, has strengthened against the euro since the beginning of this year. these external factors will have a continuing dampening impact on our domestic inflation rate – which is likely to remain close either side of the inflation target. overall then, although the prospect is for renewed growth with continuing low inflation over the next couple of years, the tension between the different sectors of our economy has not for the time being disappeared. against the background of that brief description of recent and prospective developments in the economy, let me now try to draw out what we can, and what we cannot, hope to achieve through monetary policy. monetary policy operates on the demand side of the economy, and essentially what we can hope to do – and what we are aiming to do - is to keep overall demand broadly and continuously in line with the underlying supply - side capacity of the economy to meet that demand. how close we come – on average and over time – to meeting the 2½ % inflation target is in effect simply a measure of our success in achieving macro - economic stability in this wider sense. we cannot directly affect supply - side capacity – the underlying rate of growth that we can expect to sustain. but, by operating symmetrically – as we have shown that we do – we can provide an environment in which supply - side improvements ( for example, more rapid productivity growth which apparently explains the stronger performance of the us economy in the past few years, but which we have yet to see in this country on anything like the same scale ) have the best chance of feeding through into faster sustained output growth. and, to the extent that we are successful in maintaining macro - economic stability, that can help to improve our supply - side performance indirectly by lowering real long - term interest rates and encouraging better decision – making in the economy as a whole with less distortion from unnecessary erratic movements, particularly in nominal values. but we can only hope to maintain macro - economic stability for the economy as a whole. what we cannot hope to do is to provide an equally stable environment for every sector of the economy or for every business enterprise, nor therefore can we hope to maintain a stable environment for those regions of the country with heavy concentrations of particular sectors or businesses. we cannot hope, for example, nor should we seek, to obstruct structural change. consumer demands change over time, and so, too, do technologies and management and production techniques. competition, to seek out such changes and to exploit them to meet social needs more efficiently – however