Monetary Policy, Stability and Structural Change

In this speech, Paul Tucker, Executive Director for Markets and a member of the Monetary Policy Committee, discusses structural changes affecting the UK economy and confronting policymakers. That pervasive change has occurred is evident in, for example, lower variability in output growth and inflation; less inertia in inflation; and uncertainty about the extent to which demand pressures feed through into wages and prices. The underlying forces affecting firms' price and wage-setting behavior include more flexible labor markets, more complete capital markets, globalization, the IT revolution - and also monetary regime change itself, which makes it easier for businesses and consumers to distinguish relative price changes from more generalized price inflation. Disentangling the effects of such structural shifts from cyclical influences on the economy is a major challenge, which highlights the uncertainty facing policymakers. Against that background, Mr Tucker points out that debates about cyclical conditions often lie well within the margins of error of any sensible estimate of underlying trends; and that a sense of perspective is needed about month-to-month deviations from the inflation target. Over the medium term, well-anchored inflation expectations are vital to the regime. But policy credibility cannot be assumed. It has to be achieved, and continually re-achieved, by policymakers - through actions, and reasoned explanations of those actions