Box B: A serious monetary policy failure – how policy-makers let the inflation cat out of the bag

Since the late 1970s and early 1980s, it has been widely recognised that monetary policy needs to play the key role in controlling inflation. High interest rates were used to subdue UK inflation in the early 1980s and again in the late 1980s/early 1990s. On both occasions, the official Bank of England rate was raised to 15 per cent or higher. Inflation was brought under control, but a severe cost to the real economy. The early 1980s recession was the worst post-war economic downturn in terms of its broader economic and social impact. The unemployment rate rose to double digit levels in 1981 and stayed over 10 per cent until 1987. The UK economy bounced back more strongly in the 1990s, partly because of labour market reforms - introduced in the 1980s and 1990s - and partly as a result of a more pragmatic approach to economic policy under John Major's government when compared with Margaret Thatcher's administration in the early 1980s.