David Ramsden: Shocks, inflation, and the policy response

Speech by Sir David Ramsden, Deputy Governor for Markets, Banking and Resolution of the Bank of England, at the Securities Industry Conference, London, 7 October 2022.

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

Thank you very much for the invitation to speak today. As one of the nine members of the Monetary Policy Committee (MPC) I am going to use my time today to set out my thinking on the shocks that are hitting the UK economy, what these mean for the outlook for inflation and what the MPC is doing in response to return inflation sustainably to our 2 per cent target in the medium term. Fulfilling our remit matters for everyone in the UK and for everyone attending this conference. Because history tells us that low and stable inflation provides the best conditions for durable investment and innovation, which are in turn key ingredients for sustainable growth.

I gave a speech back in February also on the theme of shocks. That there is enough material for a sequel less than eight months later highlights just what an unusual period this is in terms of the number and scale of shocks and the impacts they are having.

Let me start by saying what I mean by shocks. Economists, along with other professions, have lots of different ways of identifying and categorising shocks and their implications. For today's purposes shocks are new, unanticipated developments which are clearly distinguishable from more routine developments.

As an MPC member I want to try and bring out how I've been thinking about each shock in terms of the impact on demand or supply in the economy and the time frame over which these impacts persist. Demand being what we actually observe in terms of output, income and expenditure. Supply being more about the capacity of the economy. In terms of inflation, if a shock pushes up demand relative to supply then inflationary pressures are likely to build. Similarly if an unanticipated development pushes up supply relative to demand then inflationary pressures will subside.