Has the Bank of England learned nothing from its errors on inflation?

In the past few decades small interest rate changes have worked. But conditions now are like the Seventies

- Stephen King

HOW many times over the past two years has the Bank of England forecast a significant, lasting prob. lem with inflation? The answer is "never". Yes, the Bank is prepared to accept that inflation might be rather punchy at any one moment in time. The Bank will even acknowledge that inflation might still be rather high 12 months down the road. But in two years' time? Never.

This longer horizon is important because the Bank believes the full impact of interest rate decisions made today will only be felt in two years. All sorts of random events can affect inflation in the near-term, but over the longer term, it's monetary policy that matters.

There is, however, a rather obvious problem with this approach. The Bank, it seems, can never be wrong. Indeed, its own projections - based on financial market expectations of future policy rates - mostly confirm as much. Inflation will only stray from the Bank's two per cent target if either, first, the Bank itself thinks those financial market projections are wrong or, second, there is unforeseen random future inflationary "noise".