Central Banking after the Great Recession

The UK’s inflation targeting framework is now a full quarter of a century old, while the Bank of England’s Monetary Policy Committee has just celebrated its 20th birthday. For the first 15 of those years, growth was steady and inflation close to target. Indeed, according to the available statistics, it was the most stable period since the dawn of the Industrial Revolution. No wonder Mervyn King christened it the ‘NICE decade’ – Non-Inflationary Consistently Expansionary. And, of course, the UK was not alone: many other advanced economies were enjoying similarly benign macroeconomic conditions. Nudging policy rates up or down in the region of 4–6 per cent served to keep our economies growing and inflation on track.We thought we had this central bankingmalarkey well and truly cracked. After Hubris, of course, came Nemesis, in the shape of the 2007–08 North Atlantic Financial Crisis and its sibling the 2010–12 Euro-Area Debt Crisis. The task of maintaining macroeconomic stability turned out to be far harder than central bankers imagined, while the recovery after the twin crises has been agonisingly slow. Policy rates have been near their effective floor for almost a decade, while central bank balance sheets have ballooned as a result of large-scale asset purchases. A major tightening of the regulations governing banks and other financial institutions is under way. And we are all trying to work out how to design and implement macro-prudential policies effectively. Central banking has never looked more daunting. In my remarks this evening, I want to reflect on some of the challenges facing today’s central bankers. Are we just passing through a period of purgatory before normal service is resumed?Or are we confronted by a new world that demands more radical solutions?