Wednesday, 13 February 2013

BoE's Exceptionally Supportive Monetary Policy: Will Do More if Necessary

In the opening remarks of The Bank of England (BoE) Inflation Report for February 2013, Mervin King today stated, after first having explained that "Inflation has remained stubbornly above the 2% target, and was unchanged in January at 2.7%",
You might be tempted to think that an above-target inflation forecast justifies a tighter monetary policy. Certainly, ensuring that inflation returns to target in the medium term is our primary responsibility and objective. But the MPC’s remit is to deliver price stability in the medium term in a way that avoids undesirable volatility in output in the short run. The prospect of a further prolonged period of above-target inflation must therefore be considered alongside the weakness of the real economy. Attempting to bring inflation back to target sooner would risk derailing the recovery and undershooting the target in the medium term. So long as domestic cost and price pressures remain subdued, we will continue to look through the temporary, albeit protracted, period of above-target inflation in order to support the recovery in growth and employment.
That policy stance is already exceptionally supportive of output. Interest rates are close to zero and the Bank’s balance sheet has expanded by a factor of five since before the financial crisis. Expressed as a share of GDP, the increase in our balance sheet since 2007 is greater than that in the United States, Japan or the euro area. But, if necessary, we will do more. At its meeting last week, the Committee agreed that it stood ready to provide additional monetary stimulus if warranted by the outlook for growth and inflation.
So, expect more money printing by the BoE going forward which should provide upward support for the UK stock market (and other assets). Not quite so good for the pound sterling though.

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