A period of overshooting would be followed by a period of undershooting, and vice versa 26 . Assuming complete credibility, this would mean that following an adverse demand shock, households and firms would expect sufficient policy stimulus to plug the gap left by deficient demand and, on top of that, to generate a little excess demand in order to raise inflation above its average and so bring the price level back to its targeted path. The consequent rise in near-term inflation expectations would, it is argued, make the job of offsetting the initial adverse shock somewhat easier. I wonder, though, whether price-level targeting might, in fact, endanger credibility by the extra complication it would bring to the formation of inflation expectations. When asked about what rate of inflation we are trying to deliver over the long run or cyclical horizons, the MPC’s answer is virtually  26  A short or a long horizon could be set for ‘correcting’ deviations from the targeted path for the price level. See King, M.A., 1999, ‘Challenges for monetary policy: new and old’, Symposium on ‘New challenges for Monetary Policy, Federal reserve bank of Kansas City at Jackson Hole, Wyoming . BIS Review 46/2006  9  always the same: 2% on the CPI (potentially departing from that only on rare occasions when, after a major supply/cost shock, we wanted to get inflation back to target more gradually than usual).
I do not think it is coincidence that arguably the two most significant monetary policy decisions taken over the past year – the decision to reduce Bank Rate by 1.5 percentage points in November and the announcement in February that the Committee had sought approval to use the Asset Purchase Facility to conduct large scale asset purchases – occurred in months when the Inflation Report was published. The quarterly forecast round provides an opportunity for the Committee to reassess thoroughly its view of the economic outlook. This view is then explained and communicated via the Inflation Report and in particular through the projections for GDP growth and inflation contained in the Report. In both November and February, the judgement of the Committee was that, without further substantial easing in monetary policy, there was a significant risk of a large and persistent undershoot of the inflation target. Given the transparency of these judgements and the clarity of the target, it would have been courageous not to have taken the decisions we did. The inflation target is symmetric. Likewise, the discipline it imposes on the MPC is symmetric. The inflation target has been instrumental in ensuring that monetary policy has responded boldly and decisively to the events that have unfolded since the autumn. And, when the time comes, the clarity and transparency of the inflation targeting framework will ensure that the Committee takes the right decisions on the way back up, however courageous or unpopular those decisions might appear.