Progressive economic growth will continue in this case. Any delay would require us to raise the key rate more significantly in the future, or even to pursue tight monetary policy. After today’s increase in the key rate, we have approached the threshold between accommodative and neutral policy. Taking into account the time lag effects of policy, monetary conditions will generally stay accommodative for a while longer. We will be closely monitoring how the market will be adjusting to our decisions. I would now dwell on the factors of our today’s decision. I will start out with inflation. Today, the acceleration of price growth is absolutely obvious across a wide range of products and services. This is caused not only by one-off factors and the pass-through of higher production costs, but also by the stronger impact of the steady component of price dynamics to an increasingly greater extent. In our opinion, this growth reflects the monetary nature of inflation. It is the fast rebound of aggregate demand exceeding the capacity to expand supply that has sped up price growth. As demand is high, this enables producers to pass through their increased costs to end-user prices. Production costs have really risen. Specifically, the growth of world prices for raw products (primarily, for wheat, steel, oil, and timber) has boosted production costs of many goods and services in the consumer basket. For instance, global steel prices have surged by 50–70% over six months.
Spencer Dale: Inflation targeting and the Monetary Policy Committee’s forward guidance Speech by Mr Spencer Dale, Executive Director, Monetary Policy, and Chief Economist of the Bank of England, at the International Journal of Central Banking Annual Conference, “Inflation targeting and its discontents”, Warsaw, 6 September 2013. *  *  *  A central theme of this conference has been to highlight potential shortcomings of inflation targeting and to consider potential alternatives. I believe that the traumatic events in the UK economy over the past five years have, in fact, strengthened the case for inflation targeting. The credibility of the inflation target has played a crucial role in anchoring inflation expectations over the past five years, a period in which inflation has been consistently above target. That credibility has been vital in giving the Monetary Policy Committee (MPC) the flexibility to loosen monetary policy aggressively in order to support growth and jobs. But while it has not constrained the MPC’s freedom to act in support of the economy, the inflation target, on its own, has proved less well suited to addressing some of the exceptional communications challenges posed by the sustained combination of weak growth and elevated inflation. I would highlight two in particular: the need to make clear the central role that monetary policy has played in supporting output and employment; and the need to provide guidance about the Committee’s view of the appropriate trade-off between bringing inflation back to target and stimulating the recovery.