Our decision to shift the focus of the presentation to market rates was coupled with a decision to publish forecasts for three years, rather than two, as was previously the case. This did not reflect a change in policy horizon – we are required to meet our 2% target ‘at all times’. But it did provide useful context for interpreting the gradient of inflation forecasts at the two year horizon, and hence a clearer indication of future policy, if the economy evolves in line with the central projection. The shift to using a market rate assumption was a very modest step towards greater transparency. At a technical level, it is a non trivial task to translate any market rate yield curve into a conventional forecasting assumption which is a genuine reflection of market expectations of future official interest rates.18 And markets are themselves uncertain about the path of future rates so we publish a fan chart for market interest rate to help quantify that uncertainty, based on options prices. There is a big difference between a conditioning assumption and a commitment, not least because there is a big gap between anyone’s current guess at where rates might need to go to meet the inflation target, conditional on the data available at any point in time, and where the MPC will actually take rates given the information it may have in the future.
Rachel Lomax: Inflation targeting in practice - models, forecasts and hunches Speech by Ms Rachel Lomax, Deputy Governor of the Bank of England, to the 59th International Atlantic Economic Conference, London, 12 March 2005. I am most grateful to Jens Larsen, James Bell, Fabrizio Zampolli and Robin Windle for research support; and to Charlie Bean, Peter Andrews, Spencer Dale, Phil Evans, Laura Piscitelli and other colleagues at the Bank of England for helpful comments. *  *  *  Introduction Five and a half years ago in his Monnet lecture Charles Goodhart1 was able to talk with some confidence of the features that particularly distinguished the UK’s approach to inflation targeting. Today with over 20 countries, in every habitable continent, formally operating some variant of inflation targeting and many more adopting some parts of the framework, all actively sharing experience and best practice, I suspect that most aspects of our approach would find a counterpart somewhere else in the world. But Charles’s focus on the Monetary Policy Committee’s (MPC) personal engagement in producing a published inflation forecast still seems to me to capture the essence of the UK’s approach. Today I want to talk about the role that forecasting has come to play in helping the MPC to take and communicate its decisions. In what sense does the Committee really ‘own’ the published forecasts that go out under its name? How much use do we make of models, and what models do we use?