And the results slip reads pretty well. In particular, the inflation target was instrumental in anchoring the credibility of policy, without which the MPC would not have been able to respond so aggressively. Without credibility, there can be no flexibility. And the MPC has used that flexibility to the full, providing extraordinary levels of stimulus to support growth and jobs. But the nature of the inflation targeting framework meant that it dropped a few marks in terms of helping the MPC to communicate the role monetary policy played in supporting the recovery. That risked undermining the democratic legitimacy of inflation targeting. Likewise, the inflation target on its own was less suited to explaining the MPC’s view of the appropriate trade-off between the speed with which inflation is returned to target and the support provided to the fledgling recovery. The forward guidance announced by the Committee retains the primacy of the inflation target while allowing the Committee to more effectively tackle these communication challenges. In so doing it enhances the transparency and accountability of monetary policy. The guidance also provides a robust framework in which the MPC can explore the scope for economic expansion and helps to provide greater clarity about the likely path of monetary policy as the economy recovers. The inflation target remains front and centre in the conduct of UK monetary policy. Price stability remains the primary objective of monetary policy.
The forward guidance provided by the Committee in August can be seen as a response to these challenges. To retain the clarity and credibility of the inflation target but to augment the framework so that monetary policy is better equipped to address the exceptional challenges currently faced by the UK economy. In this talk, I will provide a post-crisis report card for the UK’s inflation targeting regime and explain how the MPC’s forward guidance responds to some of the areas exposed as having ‘room for improvement’. I will also show how a threshold for monetary policy defined in terms of the unemployment rate is particularly helpful in addressing two other challenges currently facing the MPC: the uncertainty surrounding the future path of productivity; and the need to provide greater clarity concerning the setting of monetary policy as the economy recovers. A bit of background Before doing so, it is worth highlighting three features of the UK’s economic performance over the past five years which should be borne in mind when evaluating the performance of the UK’s inflation targeting framework and understanding the Committee’s decision to provide forward rate guidance. First, CPI inflation has been above target for almost this entire period (Chart 1). Fifty four months out of the past sixty to be precise. Over this period, CPI inflation has averaged 3%. And, on the basis of the MPC’s central projection in the August Inflation Report, it is expected to remain above target until the second-half of 2015.