But let us start at the beginning. Shortly after the adoption of inflation targeting, my predecessor but one, Lord Kings down (Robin Leigh-Pemberton as he then was), gave an important speech at the London School of Economics indeed in this room entitled “The Case for Price Stability”. I remember it vividly – for I had been involved in drafting it. It was an exciting time; we were reconstructing British monetary policy after the trauma of forced exit from the ERM. In those days, of course, the Chancellor set monetary policy and the Bank of England played only a behind the scenes role. But the role of the Bank was about to change – first with the Inflation Report in February 1993, which gave the Bank its own public voice, and then with independence for the Bank and the creation of the Monetary Policy Committee (MPC) in 1997.

The inflation target was born out of the experience that high and variable inflation was very costly to reduce and that only a policy based on domestic considerations would be credible. The objective of monetary policy in the medium term would unambiguously be price stability. As the then Chancellor of the Exchequer, Norman Lamont, put it “we wish to reduce inflation to the point where expected changes in the average price level are small enough and gradual enough that they do not materially affect business and household financial plans”. The idea that there is a long-run trade-off between price stability and employment had long since been abandoned. That intellectual revolution, associated with the names of Friedman, Phelps and Lucas, had stood the test of time and formed the foundations of inflation targeting.