Bank of England Targeting High Unemployment
Simon Wren-Lewis is right to claim that the Bank isn’t targeting 2% inflation on the two year horizon. At two decimal places, the Bank’s median forecast for the CPI rate is 1.96% on the two year horizon. That’s what you meant, Simon, right?
Please, everybody, apply more Svensson. The Bank’s forecasts are what the Bank is targeting. There is no difference between the two. The forecasts tell us exactly what the Bank expects to happen to the UK economy.
Carney made it 100% clear that the MPC will adjust the “tools” of policy if they do not think the economy is on an acceptable course. He made it 100% clear that the MPC do think the economy is currently on an acceptable course; that is why they did not adjust QE/talk down rates/extend FLS/or whatever at the August MPC meeting.
It is 100% clear that the course the MPC currently expects the economy to follow is most likely to involve unemployment staying above 7% for the next three years. We now have the fan charts to prove it.
Ergo, the Bank of England is now targeting high unemployment.
It cannot get any clearer, or more transparent than that. It is a welcome improvement in transparency! The Bank have made it 100% clear that “price stability” remains dominant over all other concerns. No wonder the hawks signed up.
IR & press conference roundup:
1. Carney gave an impressively scary “steely eyed hawk” look to the WSJ’s Simon Nixon (who is a hawk, duh, like all WSJ employees) when pressed on whether the Bank cared if house prices rose 15% next year. “No, Mr. Bond, we expect you to die.” – uh sorry, no, he said they were going to target 2% inflation (HT Marcus).
2. There was no addition to the BoE’s current levels of creditism. Celebration!
3. Scott rightly points out that UK monetary policy is still significantly looser than it was this time last year (market inflation expectations and equities up), even though the MPC undershot expectations. True. It is worth noting that the MPC has now undershot expectations with three consecutive announcements: the July MPC minutes, the August MPC decision, and now the IR.
4. Bill Keegan (Observer) asks the obligatory “but what about the tight, tight fiscal policy?” question. Carney, paraphrased: “Good one Bill, very funny. We don’t give a damn about fiscal policy, we only care about the CPI. Have you seen the CPI figures, Bill? They’re shocking.”
5. David Smith (Sunday Times) tries to trip up the new kid in town, quoting the RPI-based market inflation expectations. Carney is not at all amused. Don’t expect any exclusive interviews with the Guv’nor any time soon, Mr. Smith.
Any fiscalist who thinks this is a worthwhile improvement in UK monetary policy can take their plans to “do public works and create jobs”, get in their time machines, and bugger off back to the 1970s. The hawks were totally victorious today.
I must end with a special mention for one Mr. Ed Balls MP, whose response to the IR provides us this with this priceless quote:
Given the high inflation we have seen over the last couple of years it will be very important that the MPC stays vigilant to inflationary risks.
Thanks so much for that one, Mr. Balls. Apparently, those who failed to learn from Japan are indeed doomed to emulate it.