particularly if households retrench further. rather, my vote to raise rates was driven by a concern that – despite a relatively weak outlook for growth – the risks to the inflation target in the medium - term were to the upside. in particular, the risks from continuing global price pressures and the effects of the prolonged period of above target inflation meant that the level of demand consistent with achieving the inflation target had probably fallen. nasty reasons rather than nice ones. 15 i should stress that i ’ m not at all certain that this will turn out to have been the right policy decision. a key lesson i learnt from the financial crisis is that economists know a lot less about the economy and how the economy works than many would like to believe. policymakers need to approach their task with humility and pragmatism. if growth turns out to be materially weaker than i anticipate or other medium - term pressures on inflation ease unexpectedly, i will reverse my decision. but with growth expected to be around its average historical rate, inflation likely to remain above 4 % for the rest of this year and bank rate at record low levels, some withdrawal of policy stimulus seems sensible. the juxtaposition of high inflation and loose monetary policy means that there is an onus on the mpc to explain its actions. the case for the defence needs to be made. and we have a good story to tell. we can explain why inflation has been above target for much of the past few years. we think we understand – albeit with the benefit of hindsight – why we have been surprised by the strength of inflation. and we have learnt from those episodes. i can ’ t say that monetary policy will perfectly anticipate every twist and turn of the economy. we will continue to be surprised by events and need to adjust policy accordingly. but i can assure you that the mpc remains as committed and as focused as ever in our determination to hit the inflation target. this distinction between nice and not nice reasons for raising bank rate was made in an interview by charlie bean with the western mail on 1 february 2011. bis central bankers ’ speeches bis central bankers ’ speeches references batini, n, and e. nelson ( 2005 ), “ the u. k. ’ s rocky road to stability ”, working paper no. 2005 – 020a, federal reserve bank of st. louis. bean, c ( 2011 ), “ the mpc ’ s policy dilemma ”. speech at abi ’ s

##el ( 2001 ), taylor ( 2000, 2007 ), devereux, engel and storgaard ( 2004 ) ). empirical studies such as ihrig et al ( 2006 ), found that the exchange rate pass - through to consumer prices in the u. k. had fallen from 0. 20 before the 1990s to almost zero thereafter ; similar effects were found in other g7 countries with the exception of germany. the february 2011 inflation report ( section 4 and the box on pages 34 – 35 ) describe estimates which suggest that import price increases since 2007 have added 4 % to 6 % to the overall price level. this equates to pass - through of between 66 % and 100 %. i discussed some reasons for why the degree of pass - through may have been larger or at least faster than predicted by earlier studies in a speech last year ( dale 2010 ). the analysis presented here is based on the forecast made in february 2009. the extent of the surprise stemming from the degree of exchange rate pass - through in subsequent forecasts reduced more quickly than suggested by this analysis since the mpc learnt from this high pass - through and adjusted subsequent projections accordingly. there are of course many other elements of the mpc ’ s forecasts which have differed from what was projected. for example, previous bank analysis ( see the box on pages 48 – 49 of the august 2010 inflation report ) has highlighted the smaller than expected impact from the weakness of demand. acting in the opposite direction, it appears that consumer - facing companies may have squeezed their margins by more than had been anticipated during 2009 / 10. the various changes to vat during this period have also complicated the task of forecasting inflation. however, relative to the february 2009 forecast considered here, changes in vat did not contribute significantly to the surprising strength of inflation in 2009 / 10, since the effects of the temporary reduction in vat in december 2008 were included in that forecast, and the main impact of the more recent increase in vat did not come through until the first quarter of this year. bis central bankers ’ speeches thinking that the degree of pass through may be relatively limited, but by the start of 2010 that judgement was shown to have been wrong and we have incorporated close to full - pass through in forecasts since then. by contrast, the unexpected strength of inflation through much of 2010 largely stems from the surge in commodity prices. could inflation remain high? to summarise : there ’ s no great puzzle as