Thursday, March 01, 2007
Rachel Lomax on the Great Stability
Posted by David Smith at 09:00 AM
Category: Thoughts and responses

In a thoughtful speech, Rachel Lomax, the Bank of England's deputy governor with responsibility for monetary policy, argues that the Bank has almost done too well in keeping inflation close to target, so that when it moves away from it a little, as recently, the reaction is overdone. It is a point well made. Some people have responded to the recent small and temporary rise in inflation as though this is the return of the horrors of the past. Here's a summary:

The so-called Great Stability of the past decade has bestowed on the MPC “the great gift of credibility.” But the Great Stability is itself something of a puzzle and its legacy has helpful and unhelpful aspects. Referring to the policy challenges posed by the impact of higher energy prices, she comments: “On the helpful side, there is no doubt that a highly credible monetary policy framework has helped to contain inflation, in the face of a very large cost shock. The less helpful legacy is that even a small movement in inflation away from target - one percentage point - has prompted some highly coloured media coverage, and may have unsettled people’s expectations about where inflation is headed in the short run.”

She says “there is a dilemma here, with which the MPC has been grappling over the past few months. And it has left me with a nagging worry. My concern is this. If the price of maintaining the public’s confidence is that we have to try to keep inflation within a whisker of the target at all times - even in the face very large shocks - the flexibility that is such an important feature of our present arrangements may get significantly eroded. That is why it is a pity that the open letter procedure has been widely misrepresented as a punishment rather than as an opportunity for the MPC to explain itself”.


If this 'extreme' reaction to modest deviations in inflations is the price we have to pay for well anchored long-run inflationary expectations, surely it is a price worth paying. My only worry would be if it prompted over-reaction in policy response from the Bank itself, but I doubt that would ever happen.

Posted by: Caravaggio at March 3, 2007 03:06 AM
Post a comment

Remember personal info?