Mervyn King: I think that there has always been a concern that education of financial and monetary matters was a matter of experience as opposed to formal training. And given the complexity of many of the decisions which people make for their own lives, pensions for example, let alone an understanding of the wider policy issues on which they are expected to vote, then it would be fair to say that we are keen to encourage much broader and wider education in this area.

Question: Is there any comparative evidence to suggest that, say young Americans or young French and Germans are more aware of monetary matters than their British counterparts?

Mervyn King: I don't know the answer to that question. I would be surprised if there was very much difference. I think in every country the complexity of the decisions that people make has gone up in terms of their personal finances. You can see that here and in the US in terms of the numbers of people who own equities directly.

I suspect that, in terms of knowledge of financial and economic policy, if anything, there is a greater difficulty now in finding coverage of detailed policy issues, given the spread of television as opposed to newspapers. There is much greater choice in the way that people spend their time. In a similar sense I imagine that MPs find it more difficult to communicate directly with their constituents as there is a much greater breadth of information - the number of interviews, the number of TV channels, all of which diverts the constituents' attention.

Whereas in the past, when I was younger, reading a Parliamentary report was something that you would do if you were to read a daily newspaper. Its much harder to find that now. And I suspect that again, the information on economic policy tends to get crowded out in the sense that the coverage isn't just of the basic information, in fact often the coverage now is far more comment than the details of what's happened.

Question: We've got shares, mortgages and pensions; do you think that people are more financially aware? Or at least better equipped to deal with modern day living than they were before?

Mervyn King: I think its very hard to judge and I'm probably not in a good position to make that judgement. But, in a sense, people have to be more aware because there are more choices to be made. It isn't any longer the case that someone calls round once a week to collect a contribution to an insurance scheme - it is more complicated than that. The number of people who own their own home demonstrates that. Of course, the concern I think is always that, if you take homeownership for example, very often young people have one very large asset in their portfolio, the house, and one very large liability - the mortgage, and these are not perfectly hedged, as we saw in the early 1990s with negative equity. Peoples' portfolios at a young age are becoming dominated by one or two key assets and that is a concern. You do need to understand what you are doing before taking on commitments like that.

Question: So what exactly has the Bank of England been doing to get people to understand monetary policy?

Mervyn King: Well as you say our interest is in monetary policy rather than the wider area of financial education. What we're concerned with is to increase the awareness and the understanding of the value of low inflation. So we're trying to build up a constituency for low inflation. We have a programme of work designed to achieve that, resulting from a working party, which I chaired at the Bank. There are three parts to it; one is a competition for schools aimed at young people in the age group 16-18 who take part in a national competition where each school puts up a team, which has to, like the Monetary Policy Committee (MPC), make a recommendation on interest rates. We make a decision, they make a recommendation. And they have to play the role of the MPC. We provide information, all available on our website and we organise the competition. We had over 200 initial entries to the competition this year, it's the first year, and we had 35 heats all over the country, which took place in late November. Now we move on to the area finals in February.

Question: Will it be an annual event?

Mervyn King: We hope this will be an annual event, and the national final this year is on 23 March in London. I'll chair the panel of judges for that final and the Governor will present the prizes. The first prize is £10,000 to the winning school - so it's not a trivial amount to the school that wins. We've been very pleased by the response to the competition. But that's the first part; the idea is that we provide a lot of information to schools about the case for low inflation, about the state of the economy and how to think about monetary policy. This is material, which they might otherwise hope to find in text books, but where much of that material is out of date. Now they can get it directly from our website and they get day to day information on the British economy. We've had very good feedback from teachers and schools on that.

The second part of the programme is that we have started, in an experimental way, to commission opinion polls. We are trying to discover whether people understand what the inflation target is, that there is an inflation target, who sets interest rates, whether they understand what the impact of raising interest rates is on inflation, whether they approve of the actions of the Bank of England, whether they approve of having an inflation target even if that might mean higher interest rates at some points than others, and generally to get a feel for how people understand monetary policy. We're still experimenting with the questionnaire. We've been trialing it and we'll trial it for a little longer. But ultimately we will have a stable questionnaire, which we will then conduct on a regular basis over a number of years in order to detect whether there are changes in people's understanding or views on monetary policy - which will helps us focus our message on the areas where people feel they would like to understand more. So that's the second part, getting feedback on what we're doing.

And the third area is that we're in the process of constructing a pamphlet on the case for low inflation, which is aimed at a non-expert audience. So "everything you wanted to know about why low inflation is important but were afraid to ask". Very much that - its not aimed at people who appear on television or the well-informed industrialists who understand these issues. This is aimed very much at the person who has an interest in, but doesn't really understand how monetary policy effects inflation and how monetary policy really works. And that we hope to have that ready during the course of this year. It will be the first effort I think of a number of efforts to produce material in order to explain to people what we're about. Because when we do a speech around the country we find there's usually a very good response to our efforts to go out and just say how we work, what we're trying to achieve, and people can ask the kind of questions which they might otherwise be slightly shy of asking. And we're very open about how we work and what we're trying to achieve.So building the broader support for the objective of stability and low inflation in particular is a key objective. And we've got these three methods at present which we're using to do it; the schools competition aimed at younger people, the opinion polls - trying to discover what opinion is across the entire age range across the whole country, and then the pamphlet which should be targeted at people who would like to know more about it but are not experts themselves and would just like to read something aimed at them.

Question: Why do you think it's been inaccessible to people in the past? I mean, do you think there's an issue in terms of the city, where monetary matters have been considered too elitist, too stuffy or just too secretive in the past?

Mervyn King: I think too secretive. I think that one of the problems has been that central banks were often too secretive; they would try to cultivate an air of mystery and mystique, which is actually self-defeating. Now we understand that the impact of policy depends on peoples' understanding of how the economy works, so there's no point trying to conceal from people what we are trying to do. The more they understand what we are trying to do the easier our job actually is. Being secretive is self-defeating.

Governments I think also for a long period tried to keep all the controls, all the levers on economic policy in order to manipulate them for political purposes, and that also turned out to be self-defeating. So now I think there is something to explain, which is that neither politicians nor central banks want to be either secretive or to use monetary policy for political purposes. And therefore, there is a clear vision to be explained. I also think that we need to do it more because, if we don't do it no one else will. The press wants something new each week and once you've made the case for stability after one week they get bored, so you have to keep explaining and only when you're just absolutely sick and tired of explaining do you know that you're beginning to have a little bit of an effect. You've just got to keep going over and over it again and that's our rule - just keep explaining over and over again all round the country.

It's part of our mission to make sure people understand it, and that they come to realise that our mission in life is to make the economy stable and to achieve low inflation. Whether its harder now is difficult to say. I think that the City as an area of life has expanded enormously in terms of the number of people working in the City and in financial services, and there are big financial centres outside London; and the kind of people that work in those financial centres now, including London, come from a much broader spectrum of the population. There was a period when I think where the City was rather narrowly based socially, now it is absolutely clear that the City could only survive, and prosper if it's purely meritocratic. That means drawing in people from everywhere, including from around the world. And London prospers and succeeds because it is an internationally successful operation, hiring people with the best talent from wherever they come, whatever background they come from and that's what we do in the Bank of England.

Question: You say about the opinion polls, wanting to find out where are the areas that people say understand but in other areas where they don't understand monetary issues; and you're going to be launching this later. In any of the early studies that you've done, are there any sorts of monetary areas that you've identified that people just don't quite understand ?

Mervyn King: Well I think there are two broad results, I hesitate to generalise at this stage, there is a bit more work to do. One broad result I think is that when people are given the choice between keeping inflation low by having higher interest rates or holding interest rates low but allowing inflation to rise, typically they would prefer to have lower stable inflation. They accept that there will be times when interest rates will need to rise in order to maintain lower stable inflation. I think what we've yet to get across to people is actually the best way to have low interest rates in the long term is to have low inflation. I think people still struggle to understand why it is that putting interest rates up actually reduces inflation because the headline inflation rate, the RPI, actually rises when interest rates go up because mortgage interest payments go up. That's an oddity of the index, which is why our target is not in terms of RPI but in terms of RPIX. We are one of the very few economies, only two or three developed countries in the world, which uses an index that includes mortgage interest payments in their main measure of inflation. And we unfortunately still do that, which means that we have the problem that headline inflation rises when interest rates go up and people have got used to that, so they find it harder to understand that if you let time go by then actually raising interest rates lowers inflation. The mechanism by which monetary policy works is something which I think we still have to explain in more depth. When we change interest rates at The Bank of England, how does that mean that inflation ultimately comes down? What is the mechanism by which initially the growth of demand slows down, then the growth of output and employment slows down and then that puts downward pressure on price inflation and also wage inflation. And it will feed through ultimately to RPIX inflation. How that will work is something we are trying to get across in our pamphlet, in our speeches and other things that we do.

Mervyn King: Well, we have regular briefings at the Bank for MPs and that's partly a chance for members to come to the Bank and ask questions about how we work etc. But I think we would certainly welcome efforts to explain the case for low inflation. That I think is now an objective common to all major parties in politics and indeed our objective. One thing which we say to politicians when they do come to the Bank is; in the past quite often it has been the case that when some MPs have finally climbed the ranks and get into the cabinet, instead of finally being able to pursue the objectives which led them to enter politics, they've had to deal with a financial crisis. Our job is to ensure macro-economic stability to allow them, when they finally get into positions of power, to pursue the objectives for which they went into politics and presumably won the election. People don't enter politics to maintain lower stable inflation, nor should they. There are bigger things for politicians to worry about - our job is just to maintain this background stability of macro economic policy. And I think trying to make sure that people remember that is very important.

Question: There's a concern over a slowdown in the US economy - they've cut their rates as reported to avert a recession. We live in an interdependent global economy - should the MPC have cut UK interest rates last week in response to the US cuts?

Mervyn King: Well, you will see the minutes of our discussion on that issue when they are published on 24 January, and obviously we discussed all of these issues. All I would say is that everyone, including the US authorities, had wanted to see a slowdown in the US economy. The question is the speed of the slowdown. There had to be quite a significant slowdown and of that there is no doubt, they had been growing at an unsustainable rate.It will have effects on the UK economy, and we'll take those into account when we make our next forecast or projection in the February Inflation Report. All I would add is that the role of the Monetary Policy Committee is clearly to take into account what's happening in the US - there's no question of that, but that's not the only thing that's happening. We're setting rates for the UK not the US; we have to look at what's happening in our own economy. And there are things that counterbalance what's happening on the international front. What we have to do is to put them all together to form one picture - what is the inflation outlook in the UK and that we'll be able to do at fuller length when we have our detailed forecast and assessment of the position in our February round, and in our February Inflation Report which comes out in the middle of the month.

Question: You said that the US slowdown would have some effects. What sort of effects will they be?

Mervyn King: Well they'll contribute to slower growth in the world economy in this coming year than we had in the past. Again, some slowing was desirable because we've had the fastest growth rate of the world economy last year than we've had for well over a decade and if that had continued that would have helped to keep all prices high and will have actually pushed up world inflation. So a slowdown in the world economy is a rather welcome development. And one of the consequences has been a sharp fall in oil prices. Oil prices aren't just set by a bunch of people in the Middle East deciding what the oil price is. It's the interplay between demand and supply - and there's been quite a significant change in prospective demand. So that is not unwelcome as a development. But it will clearly affect our net trade picture - it will also have knock on affects to other economies in the world. But remember it's always the case that some parts of the world are growing faster than others and it would be a serious mistake to want all parts of the world economy to be growing rapidly at the same time. It would clearly be helpful if Japan were to recover more rapidly than it is at present, that's one economy that's grown extremely slowly in the last few years and we would all like to see it grow faster. And we wouldn't want to see too sharp a slow down in the European Union economy. But these economies, although interdependent, are not perfect substitutes for each other - they are different, and what will determine growth in Japan will be very different from what determines growth in the US. Despite the high growth in the US, Japan was in recession - it doesn't mean to say that just because the US slows down that you can predict what will happen to Japan. Different parts of the world are driven by different factors, and what matters to us is what is the outlook for the British economy.

Question: Last week's MPC decision was criticised by the CBI and TUC. Both said that it should cut interest rates; they argue that by not touching interest rates now for 11 months that the MPC has become perhaps too cautious. How would you respond to that criticism?

Mervyn King: Well it's a slightly amusing comment in one sense in that up until the middle of last year we were being accused of being frenetic and changing interest rates much too quickly. Indeed one organisation suggested that we not meet every month because that would mean that we would change interest rates less often! Now, predictably, we're being accused of being too inactive and not justifying our salary. I think both of these comments were wrong. What determines when we change interest rates is the state of the economy. If the state of the economy changes and justifies a change in interest rates we would have no hesitation in making that change - I think our track record over three and a half years now suggests that we have no hesitation in changing interest rates when we feel it appropriate to do so. And I would be quite happy to reiterate that now.Question: The former Chancellor of the Exchequer, Ken Clarke, has questioned the make up of the MPC, calling for more industrialists and market makers and financial commentators. Has he got a point?

Mervyn King: No. The point of the monetary policy committee is that the elective government takes the decision to give us an inflation target. That's not something that we set - it's a very appropriate division of responsibility between the elective government that sets the target and we who are to decide on the level of interest rates that are required to deliver that target. That's a sort of technical issue, it's an economic issue; you want people who understand monetary policy and the state of the economy. I can see why various lobby groups would want us to set interest rates in a particular way. They're concerned, quite properly, with their own self interest. Our role is to set interest rates for the UK as a whole, not just for any one part of the UK, not just for any one industry, but the UK as a whole. And to do that, you need people on the committee with the expertise necessary to meet the remit given to us by government, not to pursue any other objective; and that means knowledge of monetary policy. The kind of person who is well equipped to run a particular factory may not be the person best equipped to do monetary policy, in just the same was as people well equipped to do monetary policy probably would have no qualifications to run a particular kind of factory. And it's a big mistake to equate these two jobs, they are quite different.