Indeed, if this cushion gets internalised in expectations, it reduces the probability of disinflationary dynamics taking hold in the first place. Chart 26: Annual CPI inflation with an effective lower bound of 0.5% Per cent  2010  2012  2014  Chart 27: Annual CPI inflation with an effective lower bound of 0% Per cent  6 5 4 3 2 1 0 -1 -2 -3 -4  6 5 4 3 2 1 0 -1 -2 -3  2016  -4 2010  2012  2014  2016  Source: Bank calculations. A final, and the most conservative, insurance policy against disinflationary risks would be to ease monetary policy pre-emptively. Even if the modal view of expected inflation is for it to return to target over the planned horizon, mean expected inflation will be lower if risks are skewed to the downside. Provided policymakers care about these risks, there is then a case for setting policy in response to mean, rather than modal, inflation expectations.19 This option is not a hypothetical one. Already during the course of less than three months this year, more than 25 central banks internationally have eased policy through a combination of lower interest rates, currency adjustments or unconventional methods. Here in the UK the situation is somewhat different, with activity growing pretty strongly and slack being eroded. The MPC’s best collective judgement is that interest rates are more likely than not to rise over the forecast horizon.
Over the same period, households’ inflation expectations from the Bank/NOP survey have fallen by 90bp, 60bp and 50bp respectively at the one, two and five year horizons. Chart 20 looks at the term structure of expected inflation by households from the Bank/NOP survey, relative to the past and the Bank’s forecasts.12 The term structure of expected inflation is currently lower than at any stage since the crisis. Moreover, household inflation expectations are significantly below 2% at the two-year horizon and, to a lesser extent, thereafter. That means it is unclear, at present, whether household inflation expectations are consistent with the Bank hitting the inflation target. 11  The MPC’s February Inflation Report included a small downside skew to the inflation fan chart, but this did not extend to two years. 12  These have been adjusted to take into account the average difference between perceptions of the level of current inflation and actual inflation. 10  BIS central bankers’ speeches  Chart 19: UK household inflation expectations Citigroup 1 year ahead  Chart 20: Term structure of UK household inflation expectations Per cent  Citigroup 5-10 years ahead  Per cent  Vintage Series (2009 - 2014) Feb 2015 IR CPI Data NOP Feb 2015  5 4  6 5 4  3 3 2  2  1  1  0 2006  2008  2010  2012  2014  Sources: Citigroup. Dashed lines show series 2005–07 averages.