Photographer: Simon Dawson/Bloomberg

The Bank of England’s Great Inflation Divide

To look through, or not to look through, that is the question

What’s an inflation-targeting central bank to do?

As Bank of England officials gather this week to decipher the latest post-Brexit reports, they’ll probably assess a nasty outlook of slowing growth and faster inflation. Varying levels of tolerance for accelerating price growth are likely to be a major theme of the debate and are already dividing the nine-member Monetary Policy Committee on the need for stimulus.

The pound’s slide since Britain opted to quit the European Union is likely to push up costs for importers and stoke inflationary pressures. Sterling has weakened at least 7 percent against all its G-10 peers, prompting economists in a Bloomberg survey to boost their forecasts for price growth. 

Inflation — at 0.5 percent in June —  will rise to 2.2 percent by the second quarter of 2017, the survey shows, surpassing the central bank’s 2 percent goal. 

While minutes of the July meeting showed most of the MPC members expect to loosen policy on Aug. 4, after standing pat this month, differences over the outlook for price growth threaten to fuel disharmony.

Gertjan Vlieghe — the only official to vote for more stimulus this month — argues policy makers can “look through” short-term effects “as long as medium-term inflation credibility is maintained.” In the same vein, Chief Economist Andy Haldane said for him there’s “no real dilemma” because he doesn’t see a risk that higher inflation will become entrenched.

On the other side, Martin Weale and Kristin Forbes have both flagged the threat of above-target inflation. Forbes said she saw a risk of consumer-price growth exceeding the BOE’s goal in two years even without easing, while Weale said for him the weakness in output needs to be large enough to compensate for any overshoot.

What is clear is that the BOE will probably revise up its inflation projections in August. In the last set of predictions in May, the MPC saw consumer-price growth below target until the second quarter of 2018.

And — as officials start debating the size and extent of any stimulus package — here's the key line from July’s minutes:

“In the absence of a further worsening in the trade-off between supporting growth and returning inflation to target on a sustainable basis, most members of the Committee expected monetary policy to be loosened in August”

--With assistance from Harumi Ichikura.

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