TAILIEUCHUNG - Public attitudes to inflation and interest rates

A more likely explanation is that target rate changes have been more widely anticipated in recent years, and this squares with the Roley and Sellon (1995) observation that interest rates rose somewhat in advance of target rate increases. Bond prices set in forward-looking markets should respond only to the surprise element of monetary policy actions, and not to anticipated movements in the funds rate. In assessing the market response to monetary policy, therefore, it makes sense to focus on the surprise component; to the extent that the target rate change itself is a “noisy” measure of the policy surprise, using it as a regressor would lead to. | 148 Quarterly Bulletin 2008 Q2 Public attitudes to inflation and interest rates By James Benford of the Bank s Monetary Assessment and Strategy Division and Ronnie Driver of the Bank s Inflation Report and Bulletin Division. A key upside risk to the medium-term outlook for inflation stems from the possibility that a further period of above-target inflation could lead to persistently elevated inflation expectations. According to the Bank GfK NOP survey households expectations for inflation over the next year have risen markedly. This article focuses on the factors which may have driven the increase drawing on the results of some additional questions included in the February 2008 survey. It concludes that while the latest increases in households inflation expectations could be consistent with recent macroeconomic data increases in households perceptions of current inflation may also have played some role. The article also summarises the public s attitudes to interest rates and the conduct of monetary policy. Introduction The monetary policy objectives of the Bank of England are to maintain price stability and subject to that to support the Government s economic policy including its objectives for growth and employment. As part of its price stability objective the Bank of England is tasked with achieving an inflation target of 2 as measured by the annual change in the consumer prices index CPI . Monetary policy is likely to be most effective if people understand and support this goal. To that end the Bank uses a variety of methods to raise public awareness of its monetary policy objective. For example the Monetary Policy Committee MPC explains its interest rate decisions in the minutes of its monthly meetings supplemented each quarter by the publication of the Inflation Report. In addition MPC members explain their decisions in appearances before parliamentary committees and in speeches media interviews and regional visits. The Bank also promotes the objective of .

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