Andrew Bailey: Reflecting on recent times

Speech by Mr Andrew Bailey, Governor of the Bank of England, "Reassessing the Effectiveness and Transmission of Monetary Policy", an economic symposium sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming, 23 August 2024.

The views expressed in this speech are those of the speaker and not the view of the BIS.

I want to use my time to look behind the latest state of monetary policy, at issues that have arisen from the experience of recent years, but with some reflections on where we are now.

The pandemic caused a sudden, coincident and precipitous fall in global demand and supply – one of these did not obviously lead the other. Moreover, in March 2020 we faced monetary policy and financial stability issues arising from the same source, namely the pandemic. Taken separately, the responses should be different, with a more exceptional temporary, targeted and typically maximum force intervention better suited to dealing with a financial stability problem. In contrast, a monetary policy response of the sort used in 2020 is typically undertaken over time. But when monetary policy and financial stability issues coincide, the judgement becomes more complicated. By engaging both of the core central bank objectives, the pandemic posed an unusual but not unprecedented challenge.

As economies started to adjust to the consequences of the pandemic there was a substantial increase in global demand for goods rather than services, at a time when the supply of goods remained disrupted and restricted. This was an asymmetric demand shock. Global goods prices rose as a result, akin to a cost-push shock for open economies like the UK. This was the context of the so-called transitory assessment of monetary policy, namely that such shocks should be short-lived in impact because supply chains should recover and inflation expectations should remain anchored in anticipation of that recovery. That's the theory. The evidence suggests that, taken on its own, the global supply chain shock had run its course by the end of 2022. But a key question at that time was whether and to what extent there would also be catch-up effects in wages and services prices, and over what time period?