My guess is that the world is divided into two groups of people: those who are really interested in the process by which central banks decide on monetary policy, and those who are largely disinterested. If I’m right, and you are part of the second group, it may be wise to skip this blog.
As the job of central banks is to set interest rates to keep inflation close to target, and inflation over the recent past has been well above target, then a typical reaction might be that central banks have slipped up in some way. The Bank of England is a typical central bank in this respect, and it commissioned Ben Bernanke – Nobel prize winner and former US central bank (the Fed) chair – to review their forecasting procedures. His published report is here. This post is informed by that report, but really just represents some of my own personal reactions.
My first point is rather fundamental and crucial. The fact that inflation got way above target last year does not necessarily imply the Monetary Policy Committee (MPC) of the Bank or the forecasters at the Bank made any avoidable mistakes, as Tony Yates has repeatedly pointed out. As we should all know by now, the burst of inflation we saw after the pandemic was led by higher commodity prices (helped by an unforecastable war) and was exacerbated by supply chain problems that were not a reflection of domestic overheating in the major economies, including the UK. To use the jargon, both represented short term supply shocks that would lead to only a temporary increase in inflation. Other things being equal, the best monetary policy reaction to such shocks might well be to do nothing, which is pretty well what central banks
