Back
11 Sep 2015
Sterling’s recent rise may have less impact on inflation than estimated – BOE’s Forbes
FXStreet (Mumbai) - Speaking at the 47th Money, Macro and Finance research Group Annual Conference in Cardiff, Bank of England’s (BOE) policy maker Kristin Forbes noted that the recent appreciation of sterling has been considered as one of the most significant downward drivers on the CPI inflation in the UK, as the effect of cheaper commodities and imports continued to exert downward pressure on the overall CPI index.
During her speech, Forbes presented her own independent model describing the effects of sterling's foreign exchange rates on inflation. The model is based on placing more weigh on the "underlying causes of exchange rate movement."
"... We propose that when analysing how exchange rate movements affect inflation, it is crucially important to consider a factor that has previously been largely ignored in this literature – what drives the initial exchange rate movement."
Regarding the impact on the monetary policy path, Forbes said, "perhaps most important for monetary policy today, this approach also suggests that sterling’s recent appreciation could create less drag on import prices and inflation than we might have expected if the levels of pass-through seen after the crisis persisted. If this plays out, monetary policy would need to be tightened sooner than based on older models."
During her speech, Forbes presented her own independent model describing the effects of sterling's foreign exchange rates on inflation. The model is based on placing more weigh on the "underlying causes of exchange rate movement."
"... We propose that when analysing how exchange rate movements affect inflation, it is crucially important to consider a factor that has previously been largely ignored in this literature – what drives the initial exchange rate movement."
Regarding the impact on the monetary policy path, Forbes said, "perhaps most important for monetary policy today, this approach also suggests that sterling’s recent appreciation could create less drag on import prices and inflation than we might have expected if the levels of pass-through seen after the crisis persisted. If this plays out, monetary policy would need to be tightened sooner than based on older models."