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No need to overreact on inflation, says MPC member

A member of the Monetary Policy Committee is claiming there is no need to overreact on above target inflation.

In a speech to the Peterson Institute for International economic Adam Posen set out his vision for the MPC over the next two or three years.

He says: “The first point I want to make is that neither our forecast nor our policy going forward should overreact reflexively to that above target inflation, even though it will persist for the next few months after the coming VAT rise.

“As much as we may be tempted to demonstrate to the public or to markets how upset we are about being above target, we have to take the right lesson from our mistakes and try to forecast better in future – we help no one in this economy by getting our forecast incorrect, or worse, by setting our policy to compensate for past mistakes rather than basing it on our best forecast.”

He says high inflation is almost entirely down to a rise in VAT in January 2010 and the depreciation of Sterling.

He says: “Both the MPC and the British public should maintain some perspective on the size of our inflation forecast error given the magnitude of the shocks to which the UK economy has been subjected. That is not an excuse, but a reality check.”

He adds: “We can still control inflation over the medium-term, but the degree of extreme predictability seen then was due not just to the good policy regime, but was also partly due to good luck in terms of the absence of major shocks, and thus was misleading.”

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