LONDON (MktNews) - The US Federal Reserve's Director of Monetary Affairs Donald Kohn said Monday that while he could not detect any signs of a deflationary bias in the Bank of England's Monetary Policy Committee's decision-making process, it was a legitimate question to ask given that inflation in the UK has undershot its target for 22 months in row.
Kohn, who at the BOE's request undertook a review of the structure of the MPC, was asked whether he had seen any sign of a deflationary bias by members of Parliament's Treasury Select Committee at a hearing to discuss his report.
Kohn said, "I did not note that questions were skewed to a particular interest," referring to discussions at pre-MPC meetings between committee members and BOE staff and regional agents.
He said the process was "an honest attempt to figure out where inflation is going" and what it takes to bring it to its 2.5% inflation target.
But Kohn admitted that it was a very legitimate question to ask whether there was anything in the decision-making process that has led to RPIX inflation undershooting its target for so long. January data showed RPIX dropping to an annual rate of 1.8% -- the lowest level since comparable records began.
He said, "I can't put my finger on it," adding that he thought the MPC had been surprised by a number of things such as the strength of the pound.
Asked what he thought about the inflation target being kept at 2.5%, Kohn said, "I am not sure where the 2.5% came from. It is something that would be reviewed over time but not something that ought to change on a year-by-year basis."