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This is a space for me to comment on Economics both in terms of the specific bits if economics, how the discipline works and the academic politics. I might also be tempted into talking about the economy!

Carney on the line.

Monetary PolicyPosted by Huw Dixon Mon, May 15, 2017 15:19:08

Inflation is getting very close to the 3% upper limit and is well above the 2.5% target. This was not unexpected: it was indeed predicted by the Bank last year. As I argued last September (2016), interest rates should have been increased then in order to keep inflation closer to target in 2017. However, many forecasters predicted inflation might well rise above 3% in the next few months. For me IF inflation exceeds 3%, this will be a defining point in the recent history of monetary policy. It will demonstrate that Financial repression is the real policy of the MPC and inflation targeting is only secondary. If inflation crosses the 3% line, there is little excuse for Carney. He will blame Brexit. This has been a very successful diversion of attention away from the fact that the increase in inflation was easily avoidable in September last year. A modest rise in interest rates (maybe in line with inflation) would have been enough. The reason the Bank of England is responsible for setting the interest rate is that it is supposed to target inflation. If it is proving unwilling to do this, then its independence is really something we should all question. Blaming Brexit for a failure in monetary policy is a lame excuse.

So what would a sensible policy be? Simple. If we take the view that the real interest rate is 1%, the current nominal rate should be increased until it is equal to this 1% plus the inflation target of 2%: that is 3%. The long-run real rate might indeed be higher, indicating a long-run nominal rate at 4-4%. However, let us take things step by step...3% is at least in the ballpark.






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