15  Chart 6: MPC has managed the trade-off  16  3.0 November 2016  Inflation (%)  February 2017 2.5  August 2016 May 2017 August 2017 -1.5  -1.0 August 2016, no stimulus  November 2017 February 2018  -0.5  Excess demand (%)  May 2018  2.0 0.0  0.5  1.0  1.5  Preferred trade-off if λ=0.1  1.5  Preferred trade-off if λ=1 1.0  Since then, the Committee has managed policy to diminish steadily the trade-off, increasing employment, using up the expected degree of spare capacity in the economy, and reducing the expected overshoot of the inflation target. Throughout this period, inflation expectations have remained well anchored,  17  the volatility of interest rates  very low, and financial conditions highly supportive. Over the course of 2017, the steady absorption of slack and the prospect of moving into excess demand by Year 3 – evident in the dots showing the successive Inflation Report projections in Chart 6 – reduced the degree to which it was appropriate to accommodate an extended period of inflation above the target. As a consequence, the MPC began to remove some of the stimulus policy had been providing raising Bank Rate to ½ percent last November (the pink dot in Chart 7). 15  Calculations at the time suggested that returning inflation to target at a conventional horizon could have cost ¼ million jobs and widened the output gap to 1½%.
This is particularly important during large structural or regime shifts when uncertainty is high. In the wake of financial crises or advance of wholesale changes to trading relationships, people’s expectations for monetary policy can understandably diverge from its most likely path to the detriment of the economy’s performance. Guidance is most useful at such turning points. The views of economists and financial market participants are, of course, central to the transmission mechanism from Bank Rate, set by the MPC, to the various interest rates facing households and businesses and to asset prices more generally. Guidance can reinforce the transmission mechanism by reducing unnecessary uncertainty – not eliminating 3  all uncertainty. It is not the same as guaranteeing the future stance of monetary policy. Indeed, market participants can be expected to pay the closest attention to any explicit conditionalities around guidance and should usually be the first to update their expectations of policy as the outlook for the economy changes. Finally, guidance should be seen in the context of a series of MPC initiatives to increase transparency. In recent years, the MPC has made major structural changes to our communications ranging from publishing statements each time we meet to the simultaneous release of Minutes, Inflation Reports and Monetary Policy Summaries on Super Thursdays to the provision of the detailed assumptions underlying our projections. And last year, we introduced layered communications, with simpler, more accessible language and graphics to reach the broadest possible audience.