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Bank of England defends monetary policy

Paul Fisher, the Bank of England’s executive director for markets, has defended the bank’s decision not to tighten monetary policy when price shocks first caused inflation to exceed the bank’s targets.

In a speech delivered to the Global Borrowers and Investors Forum today, Fisher said had the bank tightened policy at the time the shocks first hit, it would have engendered a worse outcome on all counts.

He has also claimed that “the shocks that have hit the economy recently have not been caused by monetary conditions.”

CPI inflation has exceeded the bank’s target of 2 per cent for the past two years and reached 4.5 per cent in April and May 2011.

The shocks in question are “the rise in VAT, increases in global commodity prices, and fall in sterling since mid-2007.” The shocks are real economy shocks and result from having to pay more in tax and for basic commodities such as petrol and electricity as well as imports.

The VAT increase to 20 per cent and the rise in commodity prices were both unanticipated and their impact on inflation is likely to be temporary, argues Fisher.

In regards to the suggestion that the Bank may have benefited from changing the CPI target, Fisher has disagreed and said that it “wouldn’t magic away the problem.”

The best course of action, from the perspective of the Monetary Policy Committee, is to “accept the initial impact and then to gently steer inflation back to target in the medium term.”

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