The Bank of England Targets Inflation, Not Growth

The Bank of England Targets Inflation, Not Growth - at www.moneyweek.com - the best of the international financial media

Much of the recent commentary and analysis of upcoming Bank of England interest rate decisions suggests that on-going weakness in the growth of consumer spending will likely trigger rate cuts. What is interesting about much of this speculation is that it seems to reflect a view that the Bank of England should set interest rates so as to keep growth in demand and in output on an even track while also trying to stop inflation getting too far from the target. The emphasis placed on slow retail sales growth this year suggests that many take the view that the Bank should have a target for the growth in demand and output. Newspaper commentary and economists in the City often no longer bother to spell out the link between the pace of consumer spending and what that implies for inflationary pressures. The implication of much of the discussion is that the Bank should look to cut rates if the growth of spending looks set to stay below trend independently of whether that outlook also makes below-target inflation likely in the medium term.

In fact the Bank does not have two targets one for inflation and one for growth in demand and in output it only has an inflation target. Nor could it have two targets. The Bank has one instrument, the short term interest rate, so hitting two different targets is not possible unless both inflation and demand/output always moved together. In fact it is hugely unlikely that where inflation is heading and where the growth in demand and output are going will always be in the same direction.

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