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--Bank Remit Still To Hit Target 'At All Times'
By David Robinson
LONDON (MNI) - The Bank of England Monetary Policy Committee signalled at
its February meeting that a near-term hike was likely but the way it formulated
that message risks resurrecting old challenges about forecasts and policy
communication, people familiar with MPC processes over the years told MNI.
After its February meeting, the MPC was widely reported to have returned to
its 'normal' approach of setting policy to hit the inflation target in two
years' time. BOE Governor Mark Carney, however, did not say anything so specific
and even before the global financial crisis the MPC used to try to steer pundits
away from fixating on the two-year horizon.
The MPC's February policy summary stated that the committee believed that
it was "appropriate to set monetary policy so that inflation returned
sustainably to its target at a more conventional horizon."
At the press conference Carney had the opportunity to state that the MPC
was aiming to get inflation back to target in a couple of years, but he avoided
saying it that bluntly.
--NOW, TWO OR THREE?
In the relatively tranquil, or conventional, times before the global
financial crisis, MPC members wrestled with the problem of outsiders focussing
on the Bank's two year inflation forecasts.
It was in August 2004 that the MPC the MPC chose to publish a three year
ahead inflation projection for first time, rather than just a two year one, to
try and illuminate its thinking and policy approach.
BOE Deputy Governor Rachel Lomax explained back then that putting out a
three year forecast "did not reflect a change in policy horizon -- we are
required to meet our 2% target 'at all times'. But it did provide useful context
for interpreting the gradient of inflation forecasts at the two year horizon,
and hence a clearer indication of future policy."
The May 2004 forecast had inflation above target at 2.13% two years out,
the August one revealed that the MPC expected it to hold very close to 2.0%
throughout the third year.
Lomax's point was that it mattered for the MPC if inflation was likely to
move up, down, or sideways after two years and not just what where the inflation
level was in the two year forecast. That premise still stands.
Internally, a longstanding problem for the Bank has been that if market
participants focus on the two year out inflation forecast then the easiest way
to shift perceptions is to push the two year projection above or below target,
That, however, entails "reverse engineering" the projections, working
backwards from an endpoint chosen for communication purposes, rather than
publishing a forecast the committee believes in.
In 2013 the MPC's remit was altered to explicitly allow the MPC to factor
in a trade-off between tolerating above target inflation and supporting growth
and employment in exceptional circumstances. With pundits' focus now back on
getting inflation to target in two years, the risk is that too much weight will
be placed on the Bank's two year forecasts on the assumption that the
exceptional times have ended.
BOE Deputy Governor Ben Broadbent, answering a question at the Inflation
Report press conference about the Bank now "entering a different era" argued
that what the MPC is doing is pretty much what it has always done.
"I don't think it's right to paint such a discreet difference between what
you call the 'old' remit and what we have now," Broadbent said.
The MPC has always subscribed to flexible inflation targeting and has
persistently pushed back against the idea of any mechanical link between its
forecasts and policy.
--MNI London Bureau; tel: +44 203-586-2223; email: email@example.com