For example in our latest Inflation Report we published a central projection which showed inflation rising gently but steadily above the 2% target, assuming a nearly flat profile of interest rates out to three years. But the Report noted that the balance of risks was to the downside and singled out some key near term risk areas, such as the household sector. This provided a nuanced background to the MPC’s February decision to hold rates unchanged. Forecasts and public communication All inflation targeting central banks use their forecasts as a communication tool. They provide a coherent statement of policymakers’ thinking about the economic outlook and the policy stance. Together with the minutes of the policy meetings (in our case published with individual votes after two weeks), this helps to discharge the Committee’s democratic duty to explain itself, as well as supporting its credibility and helping to anchor inflation expectations.13 The Inflation Report plays a central role in the Committee’s communication. Since August 2003 the Governor has fronted the regular Inflation Report press conference, and the MPC’s appearances in front of the Treasury Select Committee has been (loosely) linked to the Inflation Report cycle. This brings me to a much debated question: how much information should a central bank provide? Academics have tended to press the case for more transparency, while practicing central bankers have been more cautious, (though much more predisposed to openness than they would have been twenty years ago).
To be sure, there have been times when differences of view about the central projection have been too significant to be handled within the ambit of the fan chart and on those (few) occasions the Inflation Report has included material illustrating the minority view. But, as the MPC’s preface to the Inflation Report notes, the fan charts reflect the Committee’s best collective judgement about the most likely paths for output and inflation and the uncertainties surrounding the central projections, while recognising that members may have slightly different views about the underlying assumptions. Forecasts and interest rate decisions How influential is the forecasting process when it comes to the actual business of taking decisions about interest rates? One yardstick might be whether the MPC is more likely to change rates in Inflation Report months. There is no necessary reason why this should be so: information accrues relatively evenly over the year, and the Committee goes through the same decision taking process every month. On the other hand, the MPC might be more likely to change rates after a systematic and full review of the inflation outlook, rather than in response to the news on the month. On this argument, ready-reckoners may give a rough indication of what the impact of new data may be, but they are no substitute for a full analysis. So in non-Inflation Report months the MPC may sometimes decide to ‘wait-and-see’ – to postpone a possible interest rate change until more evidence has accumulated.