Bank of England and Inflation

Discuss the relative merits of the Bank of England in controlling inflation

The Bank of England (MPC) are responsible for targeting inflation and using interest rates to achieve the government's target of CPI = 2%

Inflation target is helpful for improving inflation expectations. This is important in keeping inflation low. If people expect low inflation, they will not demand large wage rises and therefore inflation will be lower.

It is important that inflation policy has credibility. Interest rates used to be set by the government, but the government often cut rates for political aims (e.g. boost growth before an election) The Bank of England has avoided this. From 1997-2007, the Bank never allowed the economy to overheat and enter a boom (like the Lawson boom of the 1980s) If the economy grew too quickly they increased interest rates to reduce aggregate demand.

However, the Bank of England has still faced problems in managing the economy.

Because they target inflation, they ignored a boom in house prices. This asset boom and bust has caused problems for the economy (falling house prices in 2008 have caused lower spending)
Also because they only target inflation, some have criticised the Bank for keeping interest rates too high for too long. Arguably, they should have given a greater weighting to economic growth and rising unemployment.

The Bank has had difficulties in 2008 because the inflation is cost push. - High inflation also occurs with lower growth.