By Philip Uglow
LONDON (MktNews) - The Bank of England is well aware that the inflation target is symmetrical and takes it very seriously, Monetary Policy Committee member Stephen Nickell said in an exclusive interview with Market News International.
"We are very conscious of the symmetry and we take it very seriously," Nickell said.
However, he added that one has to be very careful about setting out to create mini-booms and mini-slumps to move inflation back to target. Nickell posed the question hypothetically of what the BOE should do if inflation were to fall and remain at 1.5% for a period of time. RPIX inflation has been below target for over 22 months and is already just above that level at 1.8%. "Should we start creating a bit of extra inflation to get us up to 2.5%?" he wondered.
It is a very tricky issue, he said, because there is a question mark over whether the BOE could control the process. "If we are going to start making inflation accelerate on purpose, so to speak, could we stop it?"
Nickell stressed that the BOE is not forecasting itself to be in such a situation, and added that a fall in the exchange rate would mitigate against such a situation arising. He added that some people might see this as desirable as it would rebalance the economy back towards the tradeable goods sector and further reduce the pressure on the manufacturing sector. Nickell concluded that he would be happy to get back to 2.5% or towards 2.5% "in an opportunistic way, such as a fall in the exchange rate." "To try and deliberately push the economy back towards 2.5% would be something that would have to be thought about very carefully," he added. "If we could keep sort of bouncing along within the right range, that would obviously be a very happy and much easier thing to do."
Asked about the level of the inflation target, Nickell said that he was not in favour of any change in the target today. "If you want people to believe in the system maybe you could have a preset date, once every 15 years or something, where you visit the inflation target, and this date is decided upon in advance".
However, he added that if one was actually setting the inflation target today, it might be made lower than the current 2.5% level.
Asked to respond to criticisms that the BOE has been overly hawkish on inflation, Nickell argued that there are two key reasons why inflation has been so low over the past few years.
First, "Inflation is still benefiting from the high exchange rate. The high exchange rate was for the inflation part of the economy a huge slice of luck, a huge positive shock which was fundamentally unpredictable."
Second, "I don't think the then members of the MPC could be conceivably accused of mistaken policies at that time because neither they or anyone else in the world could have forecast what happened to the exchange rate."