See ‘Lambda’, speech by Mark Carney at the London School of Economics, 16 January 2017. 16 Each observation shows the central projection for spare capacity or excess demand at the end of the second year of the forecast period (the 'Year 2' point) on the horizontal axis against the central projection for four-quarter CPI inflation at Year 2 on the vertical axis from successive Inflation Reports. The left-most observation (labelled "Aug. 2016 no stimulus") is a counterfactual version of the August 2016 Inflation Report forecasts with the effect of the MPC's Bank Rate cut, Term Funding Scheme and Asset Purchases removed. See ’Lambda’, speech by Mark Carney at the London School of Economics, 16h January 2017, for further details and discussion. 17 See Table 4.C in the May 2018 Inflation Report, available at www.bankofengland.co.uk/inflation-report/2018/may-2018. 12  All speeches are available online at www.bankofengland.co.uk/speeches  12  Chart 7: Trade-off in successive Inflation Report projections at Year 3 3.0  Inflation (%)  August 2016 2.5  November 2016  February 2017 August 2017  May 2017 November 2017 February 2018  2.0 -1.0  August 2016, no stimulus  -0.5  May 2018  Excess demand (%)  0.5  1.0  0.0  Preferred trade-off if λ=0.1  1.5  Preferred trade-off if λ=1 1.0 A Guidance Stocktake As the UK enters the most critical phase of the Brexit negotiations, it is useful to take stock of forward guidance and its potential role during the upcoming period.
8  For example, in the minutes of its policy meetings since mid-2014, the FOMC has repeatedly stated that “a gradual approach to raising the target range for the federal funds rate” was judged to be appropriate, while the minutes of the ECB’s policy meetings have noted that “prudence, patience and persistence with regard to monetary policy remained warranted”. 7  All speeches are available online at www.bankofengland.co.uk/speeches  7  b) Median household Bank Rate expectations Per cent 2014 Q1  6  2015 Q1  Pre-crisis average level of Bank Rate (5.2%)  2016 Q1  5  2017 Q1  4  2018 Q1  3 2 1 0  0  1  2  3 Years ahead  4  5  6  Notes: Household expectations are from the Bank/TNS Inflation Attitudes survey and show how Bank Rate is expected to increase relative to the rate prevailing at the time. Pre-crisis average Bank Rate is calculated from 1997 to 2007 inclusive. c) Proportion of households and companies expecting an increase in Bank Rate within the next year Per cent 100  EU referendum  90 80 70 60 50 Households  40 30 20  Companies  10 0  Jan. 2016  July  Jan. 2017  July  Jan. 2018  Sources: Deloitte CFO survey and IHS Markit Household Finance Index (HFI).