charles bean : monetary policy developments speech by mr charles bean, deputy governor ( monetary policy ) of the bank of england, at cutlers ’ feast, cutlers ’ hall, sheffield, 21 may 2009. * * * master cutler, lord lieutenant, high sheriff, lord mayor, my lords, ladies and gentlemen. i am very grateful to you, master cutler, for inviting me here to sheffield to speak at this great annual feast, to meet the leaders of such an important sector of british manufacturing industry, and to enjoy your magnificent hospitality. we are now almost two years into the financial crisis, which broke in august 2007. the preceding decade or so was marked by steady growth and low inflation, not just in the united kingdom but in many other parts of the world. in 2003, the bank ’ s governor, mervyn king, even went so far as to christen it the nice decade – standing for non - inflationary consistently expansionary. he was at pains to point out that one should not expect that unusual stability to be maintained. but although we subsequently fretted about the vulnerabilities building up within the global financial system as a result of the relaxed attitude to risk and the easy availability of credit, we never imagined quite how extreme the unwinding would prove, particularly after the bankruptcy of lehman's last september triggered a near collapse of the financial system and a world - wide plunge in business and consumer confidence. the result has been a sharp and synchronised contraction in economic activity across the globe and an unprecedented collapse in world trade. in the twelve months following the onset of the crisis, it seemed natural to expect those countries where the build - up in debt had been greatest, such as the united states and the united kingdom, and those sectors that seemed most exposed, particularly financial services and construction, to be the hardest hit. but that is not how it turned out. the fall in uk gdp of nearly 3½ % over the final quarter of last year and the first quarter of 2009 represents the largest half - yearly decline since records began in 1955. but that is comparatively mild seen alongside falls of almost 6 % in germany and nearly 8 % in japan, both countries running consistent current account surpluses. moreover, as most of you will be only too aware, the downturn has hit manufacturing especially hard, with output in that sector down over 10 % in the uk, 20 % in germany and 30 % in japan, reflecting the sharp decline in the demand for

has evolved, some variant of this line has been included in the mpc ’ s communication since the middle of last year. it illustrates the shift towards more data - dependent and conditional statements about the monetary policy outlook since i joined the mpc in the late summer of 2021. as is clear from the sentence i quoted, the concept of inflation persistence lies at the heart of the mpc ’ s assessment and communication of the policy outlook. in my remarks this evening, i hope to explain my understanding of what we mean by inflation persistence, and thus how it has and will influence monetary policy decisions. to emphasise from the outset : this is a personal view, not necessarily that of the committee as whole. in presenting my interpretation, i will address four questions : why focus on inflation persistence? what is inflation persistence? what drives inflation persistence? and what are the close - to - realtime indicators of inflation persistence on which the mpc is focused? in doing so, i will use one aspect of recent economic experience – specifically the adverse terms of trade shock to the uk stemming from higher imported energy prices – as a ‘ case study ’ to illustrate my points. by implication – and possibly to the disappointment of some of you – that means i won ’ t offer a comprehensive assessment of the uk economic situation and outlook in my remarks tonight. and, as a result, i won ’ t be giving any guidance about the immediate outlook for bank rate decisions, which necessarily depends on such an encompassing assessment. rather my goal is to provide some further insight into the thought process that guides my vote at the mpc : if you like, the thinking behind my own ‘ monetary policy reaction function ’. why inflation persistence? the transmission of monetary policy actions to developments in consumer price inflation famously operates with ‘ long and variable lags ’. [ 3 ] developments in economic theory and modelling have suggested that these lags may be shorter than previously thought ( owing to a direct impact of monetary policy actions on inflation expectations ). [ 4 ] but the available empirical work continues to suggest that the peak effect [ 5 ] on inflation of a change in bank rate today occurs at a horizon of somewhere between 12 and 24 months. if an economic shock comes as a genuine surprise ( in that it could not – or at least was not – anticipated ) and that shock affects inflation at a shorter horizon than the lags in monetary policy transmission, then monetary policy cannot offset all of its inflationary implications. in those circumstances, some shorter -