Mark Carney was at pains to stress several times that the BoE’s Monetary Policy Committee did not want loose policy to produce an inflation overshoot.
It’s puzzling why this concern is stressed so much.
If we were well away from the zero bound, or if we were not but QE was thought to be a perfectly adequate substitute for interest rates as a device for stimulus, the desire to prioritise avoiding an overshoot would be understandable.
However, since we are close to the zero bound, and there is good reason to doubt that QE would be an adequate instrument to loosen, the overriding priority is to generate a recovery of sufficient strength to allow interest rates to decisively escape the zero bound, and for this to be seen to be done as soon as practicable.
Inflation expectations have remained anchored, thus far. But will they continue to be? There is almost no risk that people would loose confidence in the ability of the central bank to tighten policy. It has two instruments to do it with, and the government is sure to be glad to give them a helping hand with fiscal policy if was required to. However, it’s quite likely that many will lose confidence in our ability to generate inflation and escape the liquidity trap.
Within a range of a percentage point or two, overshooting would in fact be a positively good thing, in my view, on account of it helping, should such an overshoot be believed in advance, to bring about the escape from the zero bound which we all want.