The February inflation report was Sir Mervyn King's penultimate as governor, and it was also the 20th anniversary of the first such report, which he created as the Bank's chief economist. He used the comparison to strike an optimistic note:
"When I sat in front of you in 1993, unemployment had just reached its peak of 3 million. But, although we did not know it at the time, a recovery was underway. Twenty years later, after a financial crisis and deep recession, unemployment is again much too high, and output is still below its level 5 years ago. Yet there is cause for optimism. Today too, a recovery is in sight."
He made the good point that the bulk of the economy - manufacturing and services - has continued to grow, and indeed grew by 1.2% even on pre-revised figures, last year. He also offered hope of a gradual building of the recovery, which won't be normal, but: "Further out, a continued easing in domestic credit conditions – supported by the Bank’s asset purchase programme and the Funding for Lending Scheme – together with a stronger global backdrop, underpin a slow recovery in output."
King stressed the exceptional support monetary policy has provided for the economy, but also the limits about what it can do. As he put it: "Monetary policy works, at least in part, by providing incentives to households and businesses to bring forward spending from the future to the present. But that reduces spending plans tomorrow. And when tomorrow arrives, an even larger stimulus is required to bring forward yet more spending from the future. As time passes, larger and larger doses of stimulus are required." The same is true, of course, for short-term stimulus through fiscal policy.
Inflation is above the 2% target because of factors the Bank says are largely outside its control, including administered prices such as university tuition fees. That will "make the challenge of bringing inflation back to 2% more difficult". In the meantime, the Bank will continue to "look through" the inflation overshoot, as long as inflation expectations remain well-anchored, applying monetary policy flexibly.
We will hear a lot more about 'flexible' inflation targeting. The inflation report is here.