The NIESR commented on the Bank of England's MPC decision to leave unchanged the stance of policy after revising up the Bank’s forecast of inflation to 2.7 per cent in 2017 Q4 and 2.7 per cent in 2018 Q4 in its November Inflation Report.
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The NIESR welcome this decision, as a tightening of policy to offset the temporary exchange rate shock would adversely affect demand in the economy and could lead to a deflation once temporary factors wash out.
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However, there are significant risks of tolerating a prolonged period of above target inflation.
James Warren, Research Fellow at NIESR said “The MPC’s decision to hold the stance of policy unchanged is, on balance, the right one, especially considering the reiteration that policy stands ready to respond, in either direction, to changes to the economic outlook. The period of heightened near term inflation will likely erode the purchasing power of many households over the next year or so, leaving them less well off in real terms. However, under the MPC’s own forecast, inflation remains significantly above target in the medium term. Such a prolonged period of above target inflation risks unhinging inflation expectations, especially at a time of acute uncertainty.”
Full press release
© NIESR
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