doubted the uk ’ s commitment to monetary stability in the absence of a willingness to remove operational decisions on interest rates from the political arena. long - term interest rates contained a risk premium to reflect the possibility that the timing and magnitude of interest rate changes might reflect political considerations. the “ ken and eddie show ” was probably nearing the end of its run. and both principals needed their own show. so when gordon brown announced radical changes to the bank of england and the monetary policy framework two years ago they were widely welcomed because they offered the basis for a durable commitment to price stability. what, then, is the substance of the main reforms announced in may 1997? first, there is a clear and unambiguous objective for monetary policy – an inflation target of 2½ %, set by the government, with inflation defined as the increase in retail prices, excluding mortgage interest payments, over the previous twelve months – rpix inflation. second, decisions on interest rates are taken by a monetary policy committee, or mpc, comprised of nine individuals with expertise in monetary policy – five executive members of the bank and four non - executives – who operate on the basis of one person one vote. third, the process is characterised by a high degree of transparency and accountability, both to provide the public with explanations of the mpc ’ s actions and to hold members of the mpc individually accountable for their decisions. have these reforms made a difference to the uk economy? my aim this evening is to pose and begin to answer three questions about the mpc two years on. ( 1 ) what is the track record of the mpc after two years? ( 2 ) what has the mpc learnt during that period? ( 3 ) what are the challenges for the next two years? what is the mpc ’ s track record? because of the infamous “ long and variable ” lags between changes in interest rates and their impact on inflation, the mpc does not yet have much of a track record in terms of inflation outturns. but since the target given to the mpc is for inflation, let me start there. between june 1997 and march 1999 ( the latest month for which inflation has been published ) rpix inflation averaged 2. 7 %. during that period, inflation ranged from a low of 2. 4 % to a high of 3. 2 %. over the past nine months it has remained within 0. 2 percentage points of the target, a remarkable degree of stability. it is

, is an integral part of a global and orderly rebalancing strategy. that wisdom is best embodied in one of governor hu xiaolian ’ s speeches, last july, where she demonstrated how domestic factor price and exchange rate adjustments are both substitutes and complementary. many interactions between our economies occur through capital rather than good markets ; this is normal in a “ multipolar ” world given the diversity of countries, with different preferences, demographics and levels of development. some of us save more than we spend. others need capital to finance their growth. many are aging and want to secure their future income through good and safe returns on their investments. we therefore share a common interest in well functioning global capital markets. asymmetries in financial development prevent us from reaping all the benefits of our savings efforts. these asymmetries exist for good reasons. in many emerging economies, the memories of the 1997 – 98 crisis are still there. they lead to precautionary behaviors and a very cautious approach to capital market liberalization. obviously, the case for unrestricted financial development and market liberalization has been somehow weakened by the crisis. nevertheless, we might be paying a heavy price for the disorganized state of our global financial and monetary system. while real interest rates are historically low, many investments with high returns are not undertaken. poor and emerging economies growth is, in many cases, constrained by lack of infrastructure. we may face future shortages in many essential commodities because of insufficient investment in the current period. differences in financial systems also exacerbate capital flows and exchange rate volatility, especially when, as is the case today, monetary policies are widely divergent across countries. surely, we can do better in the future. full harmonization and total convergence in financial development between different countries is neither desirable nor feasible. but ensuring that our different financial systems interact harmoniously should be a priority. there are four possible avenues for progress. first, greater convergence in financial regulation approaches between advanced and emerging economies. significant advances are being made. china, together with brazil and india has been, for a year, a full member of the financial stability board, and as, such, participates in steering and leading the effort to build a more resilient and efficient global financial system. second, we may start thinking about ways of dealing with international capital flows volatility. for one given country, capital controls may temporarily reduce the pressure on its capital account or even permanently limit the vol