By Andrew Smith, Chief Economist KPMG in the UK
Commenting on the Bank of England’s quarterly inflation report issued today, KPMG Chief Economist, Andrew Smith, said:
“As widely anticipated, the Monetary Policy Committee has announced a new policy instrument, forward guidance, aimed at stimulating the economy and reinforcing the nascent recovery. By promising not to do something it otherwise would – raise interest rates – the MPC’s aim is to get consumers and businesses to do something they otherwise wouldn’t – spend and invest more.
“The remit has been subtly changed. While the 2% inflation target remains unchanged, its status relative to the subsidiary mandate ‘to support the Government’s economic objectives including those for growth and employment’ has been re-balanced with the introduction of a numerical unemployment threshold.
“Whereas up to now inflation has always been forecast to be on target at the conventional two-year time horizon (even if the forecast has turned out to be wrong), for forward guidance to mean anything the Committee must now be prepared to tolerate higher inflation if it judges that will help to bring down unemployment.
“The implication is that inflation will be higher for longer than it otherwise would be, so real, after inflation, interest rates will be lower for longer, thus making saving less attractive and spending more so.
“Will it work? Having experimented with QE, we are now moving further along the spectrum of unconventional policies. It should be remembered that, by definition, unconventional measures are untried, untested and uncertain. But the big change is that, with this addition to its armoury, the Committee has turned unashamedly pro-growth and now looks more prepared to use all the weapons at its disposal if the recovery fails to live up to expectations.”