Challenging Times for UK Monetary Policy

Global economic developments have recently thrown up two major challenges for the setting of UK monetary policy. The recent global financial turmoil threatens to reinforce the slowdown in the UK and globally. But rising energy and commodity prices will push up inflation in the short term, and pose an upside risk to inflation expectations. In this article, Andrew Sentance-an external member of the Monetary Policy Committee (MPC)-argues that two issues will be critical to the future course of UK monetary policy: the course of the economic slowdown at home and abroad; and whether inflation expectations remain stable and well anchored. He argues that UK monetary policy has flexibility to adapt to changing circumstances and the data flow from the real economy will be very important in shaping future interest rate decisions. However, the MPC remains focused on its remit of keeping inflation on course to meet the 2% target for CPI inflation.