Most of the excitement in Mervyn King’s speech last week was generated by his comments on banking supervision.

The Bank, if it is to carry out the financial-stability role now enshrined in legislation, wants more than the governor’s eyebrows as an enforcement tool. King, while hoping for a return to economic normality, thinks it should not be business as usual for the banks, which turned his “nice” decade very nasty.

He is on the “small is beautiful” side of the debate on bank size, arguing they should not be too big to fail, holding the financial system to ransom. Alistair Darling, the chancellor, seems more laissez faire, suggesting banks can be big if they are properly run. Both agree, however, on the need to ensure big institutions can be wound down in an orderly way.

We cover these issues in detail elsewhere. But there was also, in King’s Mansion House speech and other recent output from the Bank, evidence that the ground is being prepared for a shift of policy.

The question, which you hear a lot, is how long can interest rates remain so low? Bank rate since March has been 0.5%, a level thought of as impossible even a year ago. How long, too, can other unconventional measures — quantitative easing, liquidity provision and the rest — continue?

For the markets, the question of whether the Bank will add to its £125 billion of quantitative easing — it can do another £25 billion without Treasury permission — is as important as the interest-rate issue.

King, stressing it was too soon to reverse the “extraordinary policy stimulus that has been injected into the UK economy” added it was not too soon to be preparing “exit strategies”, implying the Bank is doing so.

The minutes of this month’s monetary policy committee (MPC) meeting had a similar message, saying the Bank “could and would tighten policy” when necessary. What will this mean? The governor was clear: “When appropriate the MPC will raise Bank rate and gradually run down its portfolio of assets in a manner consistent with maintaining orderly markets.”

Alongside this, MPC members have been defending the inflation-targeting regime, insisting it would be a mistake to throw the baby out with the bathwater.

Paul Fisher, the Bank’s executive director for financial markets, told a conference that no monetary-policy regime could have prevented the current crisis or headed off the recession. Under inflation targeting “the UK experienced the most stable domestic macroeconomic conditions, in terms of low and stable inflation and steady output growth, that it has ever experienced”.

When should we expect to see the start of the exit strategy, involving higher rates and then the reversal of quantitative easing?

Inflation is important. We are seeing another drawback of shifting from the old target measure to the consumer prices index (CPI). This is falling glacially and at 2.2% is still above the 2% target. RPIX inflation (the retail prices index excluding mortgage interest payments) is in contrast at 1.6%, well below its former 2.5% target and fractionally above the point where the governor would have had to write a letter explaining why it had tumbled so far.

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