After more than 20 years, and 82 issues, Sir Mervyn King has delivered his last Inflation Report. The transparency and rationality of this innovation has been one of Britain’s most important gifts to the world in recent times, even if the UK has not actually been very good at controlling inflation itself since 2008. As its main architect and, in his own words, the UK’s “consistent monetary referee”, Sir Mervyn deserves great credit. I hope that, in retirement, he will receive it.
The economic message of today’s report is a familiar one. Inflation has been revised down so that it is shown to hit the 2 per cent target in two years’ time, and real GDP is forecast to recover gradually. Similar forecasts have proven too optimistic in the past, but this time there are clear indications that the Bank will be introducing new forms of policy easing in the next few months, which may underpin the economic recovery.
Following the astonishing arrival of Governor Kuroda in Japan, Mr Carney must be sorely tempted to follow suit in trying to jolt UK economic expectations towards a new equilibrium. He is likely to get plenty of encouragement in this from the chancellor, who emphasised in the Budget that “monetary activism” is a core part of his overall economic strategy.
In fact, Mr Osborne has asked the Bank to focus in the August Inflation Report on how the UK might adopt forward policy guidance, with thresholds, following the example of what the Fed did (successfully) last December. This is an unusually specific request from the Treasury, and even Sir Mervyn seemed sympathetic to this approach today.
In the context of high British inflation, there are serious impediments to repeating the fireworks unleashed by the BoJ, but some progress can be made, Fed-style. What exactly can we expect? Read more