BOE’s Broadbent: Come What May, to Keep Aiming for 2% Inflation Target

12 January 2021

By David Barwick – FRANKFURT (Econostream) – The Bank of England’s monetary policy will in any event continue to be set with an eye towards restoring medium-term inflation to 2%, Ben Broadbent, Deputy Governor for Monetary Policy of the BOE, said on Tuesday.

Speaking in a BOE webinar on how the pandemic had affected the composition of spending, Broadbent, according to a text of his remarks made available by the BOE, said that a ‘fair degree’ of shifting in spending patterns had occurred over the last year, possibly dampening the crisis’ immediate inflation impact, but that it was less clear whether this shifting had medium-term implications.

In general, in the current environment it is ‘more difficult than usual to infer what short-term gyrations in GDP mean for inflationary pressure further ahead’, he said. Although GDP probably fell in 4Q of last year and would likely fall again this quarter, the situation is ‘quite unlike any normal economic cycle’, he said.

‘As far as medium-term inflation is concerned, what matters more than these gyrations in output per se – very large though they are – are developments over time in the labour market’, he continued, which offer ‘the best single measure we have of economic slack.’

‘And it’s because, unfortunately, we expect unemployment to rise once the furlough schemes are wound down … that the appropriate response has been to ease policy significantly’, he said. ‘The Committee has also said that it would need firm evidence of a significant narrowing in spare capacity, and of a sustainable return of inflation to the 2% target, before considering whether to withdraw any of this stimulus.’

‘Come what may, the MPC will continue to set policy in order to achieve the 2% inflation target, in line with its remit, over the medium term’, he added.

According to Broadbent, ‘despite a very sharp recovery in the summer, as the first lockdown was lifted, it’s likely that GDP in the fourth quarter of last year was around 10% lower than at the end of 2019.’