Wednesday, February 20, 2013

British Inflation Target Is A Joke

Japan is not the only country taking unprecedented measures to push down the value of its currency. Even as inflation at 2.7% remains above its official target, and is in fact expected to rise above 3% in the coming months, and even as the Bank of England itself forecast that it won't fall down to 2% until 2016, the Bank of England will continue its "quantitative easing" and several leading members of its committee now favor increasing it.

As a result, the pound, which has already dropped by 7% against the euro and almost as much against the dollar this year, fell to new lows. That drop will of course, by raising import prices and increasing nominal export revenue, help push price inflation up further, perhaps closer to 3.5-4% than 3%.

If you push for further inflationary measures when inflation is above the target, and according to your own forecasts will remain so, how can the Bank of England still even pretend to be committed to the 2% target it is supposed to follow?

Here in Sweden, the central bank has also tended to deviate from the inflation target, partly deliberately as in Britain but in the other direction with inflation being below the target (it's currently 0.7%) to discourage households from increasing their debts. The Bank of England seems by contrast hell-bent to make Britons even more indebted than they are today.