BoE may need to tighten sooner, MPC's Forbes says

Monetary policy in the UK may need to be tightened sooner than some of the older economic forecasting models suggest, one of the Bank of England’s rate-setters believes.

Speaking at the 47th Money, Macro and Finance Research Group Annual Conference, in Cardiff, Kristin Forbes, one of four external members on the Monetary Policy Committee, said that “sterling’s recent appreciation could create less drag on import prices and inflation than we might have expected if the levels of pass-through seen after the crisis persisted.”

Forbes reached that conclusion after applying the findings of an independent research project carried out by Ida Hjortsoe and Tsveti Nenova at the Bank of England.

Her speech drew an analogy between the traditional and less than satisfactory models of currency movements and inflation dynamics and Shakespeare’s play “Much ado about nothing”, in which the main characters mistakenly end up fighting with each other over after misinterpreting events.

The main implication for the Bank’s monetary policy of the new research is that “if this plays out, monetary policy would need to be tightened sooner than based on the older models.”

That was despite the 17% appreciation seen in Sterling’s effective exchange since its recent trough in the spring of 2013, while the US dollar had strengthened by 20% but the euro had weakened by 7%.