Inflation Targeting in the United Kingdom

1
Inflation Targeting in the United Kingdom

• Tana Sawyer
• Carl Giannini
• Pui-Ching Yip

2
Definition of Inflation Targeting

• Explicitly stating a target percentage for the
  inflation rate over a specified period of time
• Guide to Monetary Policy

3
Arguments For

• Transparency of Central Bank policies
• Monetary Policy has greater effect on inflation
  in the long run
• Credibility of Central Bank builds

4
Arguments Against

• Reduce flexibility of addressing other policy
  goals
• Time-lag forecasts

5
UK before Inflation Targeting

• 1970s high inflation high govt. budget
  deficits
• 1979-1983 brought inflation below 5
• Mid 1980s focus on exchange rates
• 1990 entered Exchange Rate Mechanism (ERM)
• 1992 left ERM

6
Implementation

• 1992
• Chancellor of the Exchequer adopted inflation
  targeting
• Announced strategy 1) Inflation range of 1-4
  and target of 2.5 and 2) published Inflation
  Report by Bank of England
• 1997
• Newly-elected govt. developed strategy further
• Bank of England Act of 1998 MPC Target 2.5

7
Interest Rates

• August 2006 Bank of England increase interest
  rate to 4.75 (25 basis points) first change in
  over a year

8
Success of Inflation Targeting

• 14 year price interest rate stability
• Unexpected rise in inflation in 2006 caused the
  increase in interest rates in August.
• Further increase in interest rates in 2006 likely
• Interest Rates are expected to peak in 2007

9
Conclusion

• In the short-run, inflation targeting has been
  successful, but long term results has yet to be
  seen.