UK inflation targeting becomes even more "flexible"
Simon Ward
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A key summary measure of each Inflation Report is the Bank of England’s “mean” forecast for inflation in two years’ time based on unchanged policy. (The mean forecast incorporates upside and downside risks as well as the central projection.) Historically, a forecast above the inflation target has signalled a tightening bias to policy, and vice versa.
In today’s February Report, the two-year-ahead mean inflation forecast appears to be 2.3-2.4%* versus 1.80% in November. This is the highest since early 2011: the forecasts in February and May 2011 were 2.48% and 2.54% respectively – see chart. The MPC came close to tightening policy in early 2011; three members voted to hike rates between February and May.
The current MPC, of course, has no such bias. Indeed, the Report states that the Committee stands ready to provide additional stimulus without mentioning a possible need to tighten policy should the inflation outlook continue to deteriorate. This is likely to sustain the recent upward drift in longer-term inflation expectations, which are already barely consistent with the target. The MPC's nonchalance, in other words, risks undermining the (questionable) inflation / growth trade-off it seeks to exploit.
*Estimated from the fan chart; the precise number will be available next week.
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