12 Feb 2015
BoE governor's letter to the Chancellor of the Exchequer
FXStreet (London) - As a result of UK inflation numbers falling below the one percent threshold, Bank of England governor Mark Carney wrote to Chancellor of the Exchequer George Osborne.
Opening the letter, Carney wrote that: “On 13 January, the Office for National Statistics (ONS) published data showing that twelve-month CPI inflation had fallen to 0.5%. That is more than one percentage point below the 2% target. In line with the remit of the Monetary Policy Committee (MPC), I am therefore writing an open letter to you that describes:
• the reasons why inflation has moved away from the target and the outlook for inflation;
• the horizon over which the Committee judges it appropriate to return inflation to the target;
• the trade-off that has been made with regard to inflation and output variability in determining the scale and duration of any expected deviation of inflation from the target;
• the policy action that the Committee is taking in response; and
• how this approach meets the Government's monetary policy objectives.
Why has inflation moved away from the 2% target?
The letter continues: “In December 2014 twelve-month CPI inflation stood at 0.5%. That is the lowest figure since May 2000 and 1 1/2 percentage points below the inflation target. The MPC's best collective judgement is that roughly two thirds of the deviation from target (around one percentage point) can be attributed to unusually low contributions from movements in energy, food and other goods prices. Around a third of the deviation of inflation from the target (half a percentage point) reflects more generalised subdued inflationary pressures resulting from weak growth in domestic costs.”
The outlook for CPI inflation
The letter continues: “As described in the February Inflation Report, inflation is likely to fall further over the next few months. Sterling oil prices have fallen an additional 13% since the CPI data were collected in December, and petrol prices have fallen to £1.06 per litre on average, a further 9% fall.
“Wholesale gas prices have also declined and the major utility companies have announced reductions in the retail price of gas supplied to households. This will mean further falls of just over 4% in the retail price of gas during the early part of 2015. As a result, the MPC now judges it more likely than not that headline CPI inflation will turn negative at some point in the spring and will remain subdued for much of the rest of the year. It is therefore probable that I will need to write further open letters to you in the coming months.”
How does this approach meet the Government's monetary policy objectives?
Concluding, Governor Mark Carney writes: “The MPC's objective is to maintain price stability and, subject to that, to support the economic policy of Her Majesty's Government, including its objectives for growth and employment. Price stability is an essential pre-requisite for economic prosperity. The MPC is acting to return inflation to the target promptly by eliminating the remaining margin of slack in the economy.
“Through co-ordinated action by the MPC, FPC and PRA, the Bank of England is guarding against the build-up of risks and imbalances that could threaten strong, sustainable, balanced growth and therefore making its most effective contribution to the United Kingdom's economic performance.”
The full text of the letter can be found here.
Opening the letter, Carney wrote that: “On 13 January, the Office for National Statistics (ONS) published data showing that twelve-month CPI inflation had fallen to 0.5%. That is more than one percentage point below the 2% target. In line with the remit of the Monetary Policy Committee (MPC), I am therefore writing an open letter to you that describes:
• the reasons why inflation has moved away from the target and the outlook for inflation;
• the horizon over which the Committee judges it appropriate to return inflation to the target;
• the trade-off that has been made with regard to inflation and output variability in determining the scale and duration of any expected deviation of inflation from the target;
• the policy action that the Committee is taking in response; and
• how this approach meets the Government's monetary policy objectives.
Why has inflation moved away from the 2% target?
The letter continues: “In December 2014 twelve-month CPI inflation stood at 0.5%. That is the lowest figure since May 2000 and 1 1/2 percentage points below the inflation target. The MPC's best collective judgement is that roughly two thirds of the deviation from target (around one percentage point) can be attributed to unusually low contributions from movements in energy, food and other goods prices. Around a third of the deviation of inflation from the target (half a percentage point) reflects more generalised subdued inflationary pressures resulting from weak growth in domestic costs.”
The outlook for CPI inflation
The letter continues: “As described in the February Inflation Report, inflation is likely to fall further over the next few months. Sterling oil prices have fallen an additional 13% since the CPI data were collected in December, and petrol prices have fallen to £1.06 per litre on average, a further 9% fall.
“Wholesale gas prices have also declined and the major utility companies have announced reductions in the retail price of gas supplied to households. This will mean further falls of just over 4% in the retail price of gas during the early part of 2015. As a result, the MPC now judges it more likely than not that headline CPI inflation will turn negative at some point in the spring and will remain subdued for much of the rest of the year. It is therefore probable that I will need to write further open letters to you in the coming months.”
How does this approach meet the Government's monetary policy objectives?
Concluding, Governor Mark Carney writes: “The MPC's objective is to maintain price stability and, subject to that, to support the economic policy of Her Majesty's Government, including its objectives for growth and employment. Price stability is an essential pre-requisite for economic prosperity. The MPC is acting to return inflation to the target promptly by eliminating the remaining margin of slack in the economy.
“Through co-ordinated action by the MPC, FPC and PRA, the Bank of England is guarding against the build-up of risks and imbalances that could threaten strong, sustainable, balanced growth and therefore making its most effective contribution to the United Kingdom's economic performance.”
The full text of the letter can be found here.