Saturday, March 29, 2008

Bank of England Independence

It is widely accepted that the decision to make the Bank of England Independent was a positive move for the economy. Furthermore recent economic data suggest that the the Bank has been successful in achieving its target of low inflation and stable growth.

The Bank can take some credit for this improvement in UK inflation performance. In particular,
The Bank's independence means they avoid cutting interest rates for political reasons.
They have helped increase confidence in Monetary Policy; inflation expectations are lower. This makes it much easier to keep inflation low.

Of course, the low inflation is not entirely due to their monetary policy decisions. They were fortunate to inherit a stable economy in 1997. It will also be interesting to see how they cope in coming years. Their task is made more difficult because there appears to be a rise in cost push inflation and lower growth. This means achieving the inflation target may come at a cost of lower growth. With a general election coming up, the MPC is likely to keep interest rates higher than if the Chancellor was still able to set rates.

However, there is a danger that the Bank's remit is too narrow and that as we discussed here - inflation is not the only target to consider.

More thoughts on the success of the Bank of England in keeping inflation low.

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