mervyn king : monetary policy developments extract from a speech by mr mervyn king, governor of the bank of england, to the bank of israel, jerusalem, 31 march 2008. * * * central banks, along with the rest of the financial world, have changed markedly over the past 20 years. more open and competitive financial systems have developed hand in hand with a recognition that the prime responsibility of central banks is to maintain price stability. to help them achieve that, more and more central banks around the world have been made independent of government. the nature and extent of that independence varies from country to country, but in essence it is the freedom of either an individual governor or a monetary policy committee within the central bank to set interest rates free from political interference. that policy independence needs to be backed by organisational and financial independence which, in the case of the bank of england, is entrusted to a court of directors of the bank which decides on the budget and other relevant financial matters. for those central banks with a long tradition of independence, their pre - existing frameworks of monetary policy have proved sufficient to enable them to bring inflation down and contribute to what has become known as the great stability. but in most of the countries whose central banks have been made independent more recently, policy has been based on an explicit inflation target. inflation targeting has been the framework of choice for the past 20 years. it most clearly represents an explicit commitment by the central bank to the objective of price stability. in the united kingdom, that commitment is in the form of a target for inflation that is defined as 2 % a year, as measured by the consumer price index. in the medium term, a central bank can affect only monetary values – the price level. it cannot change the amount of goods and services an economy is able to produce. over time, there is no trade off between inflation and output, as recent uk history illustrates. between 1950 and 1997, uk inflation averaged nearly 6 %. in contrast, since 1997, inflation has been close to target and much more stable, but annual output growth has averaged a little above its post - world war ii average of 2. 5 %. in the medium term, low and stable inflation does not imply lower output. moreover, even in the short term, meeting an inflation target is in many cases fully consistent with maintaining steady growth of activity. if demand falls below the supply capacity of the economy, inflation will tend to fall. if demand rises too quickly, putting pressure on capacity

, which, more fundamentally than earnings or income, represent a measure of the ability of households to consume. the federal reserve ’ s survey of consumer finances indicates that the median real net worth of families increased 17½ % between 1995 and 1998. as one might expect, the rising stock market coupled with the spreading ownership of equities was an important factor. however, even in the face of the strong aggregate trend, median net worth declined over this period for families with incomes below $ 25, 000, and medians for non - whites and hispanics were little changed. that families with low - to - moderate incomes and minorities did not appear to fully benefit from the highly favorable economic developments of the mid - 1990s is, of course, troubling, and the survey results warrant a closer look. in the details, we find that families with incomes below $ 25, 000 did increase their direct or indirect holdings of stock, and more reported that they had a transactions account. however, they were less likely to hold nonfinancial assets - particularly homes, which constitute the bulk of the value of assets for those below the top quintile according to income. at the same time, one encouraging finding from the survey is that the homeownership rate among minorities rose from 44 percent to 47 percent between 1995 and 1998, which may be a sign of improved access to credit for minorities. although market specialization, competition, and innovation have vastly expanded credit to virtually all income classes, under certain circumstances this expanded access may not be entirely beneficial, either for customers in general or for lower - income communities. of concern are abusive lending practices that target specific neighborhoods or vulnerable segments of the population and can result in unaffordable payments, equity stripping, and foreclosure. the federal reserve is working on several fronts to address these issues and recently convened an interagency group to identify aberrant behaviors and develop methods to address them. i have no illusions that the task of breaking down barriers that have produced disparities in income and wealth will be simple. it remains an important goal because societies cannot thrive if significant segments perceive their functioning as unjust. although we have achieved much in this regard, more remains to be done. despite the considerable progress evident in recent decades in reducing racial and other forms of discrimination, this job is far from complete. discrimination is against the interests of business - yet business people too often practice it. to the extent that market participants discriminate, they erect