Adjusting to Low Inflation - Issues for Policy-Makers

Abstract

In this speech, Kate Barker of the Monetary Policy Committee considers some of the implications for the United Kingdom of the transition to a low-inflation regime. She argues that, in some areas, considerable adjustment has already occurred (financial markets' expectations, firms' target rates of return for investment and the expectations of wage bargainers.) The greater stability of the new regime also implies a permanently higher household debt/income ratio. Even so, for households it is less clear that the implications for prospective pension returns, or for debt repayment in real terms, have been fully assimilated. This implies some risk of a future change in household behaviour as the transition is completed. Of course, these added risks to economic stability will be offset by other changes, such as inflation expectations of companies and of wage bargainers remaining close to the inflation target, and from lower rates of exchange rate pass-through.