"Monetary stability" should be understood to involve a stable price level or very low rate of inflation over the long run coupled with avoidance of credit boom / bust cycles, which inflict major damage on economic performance. The two objectives are intertwined: historically, credit cycles have invariably been associated with significant and sustained price disturbances.

The Chancellor's plan, therefore, to separate responsibilities for inflation and credit control between two policy-making bodies is questionable. It would have been preferable to assign new "macroprudential" policy tools to the Monetary Policy Commitee (MPC) while expanding its remit to include leaning against major swings in money and credit expansion.

The interest rates faced by borrowers and savers play a key role in the transmission of policy changes to financial market conditions and inflation. One way of thinking about the new arrangements is that the MPC will set the risk-free rate while the Financial Policy Committee (FPC) will influence spreads by varying capital and liquidity requirements. The MPC's judgement, however, about the level of borrowing / saving rates needed to meet the inflation target may differ from the FPC's assessment based on its stability goals.

The FPC, presumably, would have leant against credit expansion during the 2005-07 boom, resulting in higher borrowing spreads and slower economic growth. Based on the MPC's forecasts at the time, however, this would have pushed prospective inflation below target, requiring the Committee to set a lower level of Bank rate, thereby undermining the FPC's attempt at credit restraint. Would the FPC have responded by requiring a further increase in capital / liquidity buffers?

The preferred alternative of adding credit stability to the MPC's responsibilities would have allowed such tensions to be resolved within a single policy-making body. The Chancellor, moreover, could have taken the opportunity to change the MPC's target from 2% inflation "at all times" to a 2% per annum average rise in the price level over the long run. This would allow larger short-term inflation fluctuations to accommodate temporary conflicts with the credit control objective while requiring the MPC to correct under- or overshoots, thereby providing a firmer anchor for long-run expectations than current arrangements (under which the Committee is able to tolerate a persistent deviation while claiming to be adhering to its remit).