The Economy and Policy Trade-Offs

Since its inception 25 years ago, the MPC has been tasked with achieving the Government’s inflation target. But the remit has also always recognised that ‘the actual inflation rate will on occasion depart from its target as a result of shocks and disturbances’. And that ‘[a]ttempts to keep inflation at the inflation target in these circumstances may cause undesirable volatility in output’.

The MPC is required to balance these short-term trade-offs between meeting the inflation target and avoiding output volatility. In 2013 the remit was clarified to also include exceptional circumstances where ‘shocks are particularly large or the effects of shocks may persist over an extended period, or both. In such circumstances, the Committee is likely to be faced with more significant trade-offs between the speed with which it aims to bring inflation back to target and the consideration that should be placed on the variability of output’. As well as balancing these objectives, the MPC is required to ‘set out in its communication…the trade-off that has been made’.