Bank of England Inflation Reports: track record

by George Hatjoullis

The Bank of England sets monetary policy with a view to achieving an inflation target (2%) over the ‘medium-term’, which is viewed as about two years. This is based on the accepted wisdom that changes in monetary policy take about two years to fully work through the system. At each meeting of the Monetary Policy Committee, policy is reassessed and set with the view that it is the policy most likely to achieve the 2% target. Every quarter the BoE publishes an Inflation Report which looks in detail at the economic outlook and assesses the inflation outlook in relation to policy. Although policy changes can occur at any meeting, they are deemed (in the financial world) most likely to occur in the meetings close to the publication of this report. Each report has a section entitled “Prospects for Inflation’. I have extracted and reproduced extracts from the summary header to this section going back to 2009, for the corresponding February reports. I will update at each report from now on.

Scrolling down you will see that the BoE expects, in the February 2015 report, inflation to return to target (2%) in two years under the assumption that the base rate will rise gradually over the forecast period. What faith should you have in this assessment? Next to each date, in brackets, I have noted the year-on-year change in CPI (the target variable) to that date. One can see that the BoEs forecast ability is poor. Based on this track record I would not bet on inflation returning to the 2% target in two years if interest rates are rising. I am more inclined to think it will fall below zero and stay there.

February 2009(3.1%)

CPI inflation falls well below the 2% target in the medium term… But the near-term path is uneven… poses downside risks to inflation. But those risks are judged to be broadly matched by upside risks…leaving the overall balance of risks to inflation only modestly to the downside.

February 2010(3%)

CPI inflation is likely to remain elevated in the near term…it is more likely than not that inflation will be below the target for much of the forecast period, but the risks are broadly balanced by the end. The prospects for inflation remain unusually uncertain and there are significant risks to the inflation outlook in each direction.

February 2011(4%)

inflation has been significantly above the MPC’s 2% target throughout the past year, and is likely to rise further in 2011… Inflation is likely to fall back… the chances of inflation being either above or below the target are judged to be broadly equal in the medium term.

February 2012(3.4%)

inflation is judged somewhat more likely to be below the target than above it for a good part of the forecast period. But by the end of the period those risks are judged to be broadly balanced.

February 2013(2.8%)

CPI inflation is likely to rise further in the near term, and may remain above the 2% target for the next two years… Inflation is expected to fall back to around the target by the end of the forecast period…

February 2014(1.7%)

CPI inflation has returned to the 2% target sooner than expected… Over the forecast period, upward price pressures fade, slack is gradually absorbed, and inflation remains at, or a little below, the target.

February 2015(0%)

CPI inflation has dropped sharply and is now well below the 2% target..The Committee judges that it is currently appropriate to set policy so that it is likely that inflation will return to the 2% target within two years. Under the assumption that Bank Rate rises gradually over the forecast period, that is judged likely to be achieved.

Updates

May 2015(-0.1% in April)

CPI inflation was 0.0% in March, well below the MPC’s 2% target…The MPC judges that it is currently appropriate to set policy so that it is likely that inflation will return to the 2% target within two years. Conditional on Bank Rate following the path currently implied by market yields — such that it rises gradually over the forecast period — that is judged likely to be achieved.

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