The New Normal, Bank of England Edition
Is this the “new normal” for the MPC?
1. Do just enough QE and expectations management to keep the CPI rising somewhere around (or above?) a 2% rate.
2. If the CPI rate is too far above 2%, and no supply-side excuses can be found, stop QE, start actively lowering inflation expectations.
3. Once inflation expectations are low enough, everybody is sufficiently uncertain about the future, and the CPI rate starts heading downwards, heroically step up and save the day by returning to 1.
The FT get this backwards, at least:
When the BoE announced its £50bn programme at noon on Thursday, the yield on 10-year government bonds rose rather than falling, indicating investors had already priced in a larger move by the central bank
Repeat after me: falling gilt yields are that investors are pessimistic about the future. Higher gilt yields are a good sign (for sovereigns which borrow in their own currency).