John Major’s government abandoned the Exchange Rate Mechanism (ERM) in September 1992 on ‘Black Wednesday’ after a futile attempt to defend sterling, principally v. the deutsch
emark. This included an ‘emergency’ jump in the Base Rate to 12% and a promise to move to 15%. ‘Black’ is not an appropriate moniker, ‘white’ would be better, but it has entered into history. Abandoning the ERM and adopting an inflation target (which they did in October 1992) set the scene for a sustained period of economic growth for the UK, GDP grew at an average of 5% for the next ten years.
The inflation target was initially set at RPI 2.5% and the first Inflation Report was produced in February 1993. Tony Blair’s new administration and Chancellor, Gordon Brown, passed the responsibility for achieving the target to the Bank of England in 1997/8. In turn, the Bank established the Monetary Policy Committee (MPC), with the responsibility of monitoring inflation and setting appropriate monetary policy to achieve the target.
The MPC has nine members, the Governor, four others from the Bank and four external members who are appointed by the Chancellor. A representative from the Treasury also attends meetings to keep the MPC briefed on Government fiscal policy and, in turn, to keep the Chancellor up to date with monetary policy. The Treasury representative does not have a vote.
In December 2003, the inflation target was changed to CPI 2%, plus or minus 1%. Outside of this 1% to 3% range, the Bank must write to the Chancellor of the Exchequer to explain why inflation has moved out of range and set out what is planned to return it to 2%.
The chart across shows UK inflation (CPI measure) since the introduction of the inflation target. Thanks to a seemingly endless series of macro events (Financial crisis, eurozone crisis, trade wars, Pandemic, Putin’s war…), the rate has been somewhat volatile in recent years, though the average for the period (the red line) is only just over 2%:
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