UK growth has, if anything, surprised to the upside over this period. UK growth in 2013 and 2014 averaged over 2%. And the MPC’s February Inflation Report forecasts the UK growing above its historic trend over the next two years. Yet despite this, the expected path of UK interest rates has continued to drift down. That is because macro-economic surprises have continued, but have switched from the real to the nominal side, from stalling growth to falling inflation. Inflation has consistently and significantly undershot the Bank’s forecasts since 2012, in particular over the past 12 months (Chart 7). BIS central bankers’ speeches  3  Chart 6: Inflation Report projections of GDP growth  Chart 7: Inflation Report projections of CPI inflation  Percentage change on a year earlier 6.0  Percentage change on a year earlier 4.0  4.0  3.5  2.0  3.0 2.5  0.0  2.0  -2.0  1.5  -4.0  1.0  -6.0  0.5  -8.0 2008Q1 2010Q1 F09 F12 Latest data  2012Q1 F10 F13  2014Q1 F11 F14  0.0 2012Q1  2013Q1  F13 N13 A14  Sources: ONS and Bank calculations  2014Q1  M13 F14 N14  A13 M14 Latest data  Sources: ONS and Bank calculations  This pattern has been mirrored internationally. Global consumer price index (CPI) inflation, on a PPP-weighted basis, currently stands at 1.2%, having fallen 1.8 percentage points over the past two years (Chart 8). Around 40 countries internationally are currently experiencing deflation (Chart 9).
Chart 25: Projection for wage growth and inflation, assuming inflation expectations put downward pressure on wages Wages - lower inflation expectations Wages - February IR projections Inflation - February IR projections Inflation - lower inflation expectations  14  6 4 2 0 -2 -4  Monetary policy If there is evidence that risks to inflation, globally and in the UK, may be skewed to the downside, the obvious next  Percentage change oya  Source: ONS and Bank calculations. BIS central bankers’ speeches  question is what, if any, monetary policy response might be appropriate as insurance against those downside risks. One insurance device comes from the specification of the inflation target itself. Even if the risks to inflation are asymmetric, central banks’ inflation targets typically are not. This reduces the risk of monetary policy imparting a “deflationary bias”. The MPC’s own mandate is crystal clear: deviations above and below the 2% inflation target are to be treated symmetrically. In its Open Letter to the Chancellor earlier this year, the MPC made clear it would act symmetrically to meet the inflation target.15 A second insurance policy against downside inflation risk comes from clearly specifying the horizon over which inflation is expected to return to target following a deviation. Provided that horizon is credible, this reduces the risk of inflationary expectations becoming dislodged from the target on a persistent basis.