Discuss the difference between inflation targets of the Bank of England and the European Central Bank. Should inflation target be symmetric - Assignment Example

Differences Between ECB and Bank of England Inflation Targets; On Inflation Symmetry Table of Contents I. Differences Between the ECB and Bank of England Inflation Targets 3 II. On Whether Inflation Targets Ought to Be Symmetric 4 References 5 I. Differences Between the ECB and Bank of England Inflation Targets As a matter of policy, the Bank of England shoots for a regime of low inflation and stable prices for the entire economy, with the idea being that inflation targeting ought to support government economic growth goals.

This inflation target where prices are stable is pegged at 2 percent. The 2 percent inflation targeting is determined from an annualized inflation rate target determined with the use of the Consumer Price Index. The Bank of England meanwhile sees that its goal is to make sure that inflation hews closely to 2 percent, with inflation that goes below this being deemed as a negative in the same way that inflation that goes above 2 percent is viewed as negative. In this sense the Bank of England does not wish to drive inflation rates to the lowest that it can go.

Stable prices mean for the Bank of England means inflation that sticks to 2 percent., In this manner too, where rises or falls in inflation beyond the 2 percent target is deemed as negatives, that inflation targeting for the Bank of England is said to be symmetrical. That said, the way the Bank of England goes about taming inflation is via the tweaking of interest rates, with the rates set so that within a period of time that is reasonable, the inflation rates could be brought to levels near 2 percent without undue economic damage from unstable prices.

The Bank of England has been employing inflation targeting as a way to manage the economy since 1992, and has managed to coax inflation rates at or near 2 percent since that time (Bank of England n.d.; Bruce and Milliken 2014; Cadman 2014; Hammond 2009; Haldane 2000). The basic thinking for the European Central Bank relating to inflation targeting is the same as for the Bank of England, in that it views rises or falls in inflation beyond 2 percent as being unhealthy, with the European Central Bank being wary of deflation in the European Union in a regime where inflation rates are way below 2 percent, as has been the case in recent quarters.

Moreover, in the same way that the Bank of England uses interest rates tweaking to move the inflation needle up or down to coax it near or around 2 percent as necessary, the European Central Bank likewise makes use of interest rates as a way to tweak inflation rates up or down. On the other hand, a key difference between the way the European Central Bank tweaks inflation versus the way the Bank of Englands inflation targeting is that for the European Central Bank, the mandate is regional. The European Central Bank has to consider the actual inflation rates for the entire region, recognizing that individual countries will have varying rates of inflation at any given time.

Moreover, with regard to mechanisms for tweaking inflation, the European Central Bank has access to means outside of interest rates setting, including quantitative easing, or the purchase of the assets of central banks in the region, in order to infuse more liquidity into Europe. For the Bank of England interest rate setting s the key mechanism for managing inflation (European Central Bank n.d.; BBC 2014; Bank of England n.d.). II. On Whether Inflation Targets Ought to Be Symmetric Inflation targets, as explained by both the European Central Bank and the Bank of England, ought to be symmetric.

This is because deflation is just as much a concern and is as damaging to the economy of Britain and of Europe as inflation is. Symmetry is more in keeping with the idea of prices being stable over the long haul, and is a desired outcome for both banks (European Central Bank n.d.; BBC 2014; Bank of England n.d.). References Bank of England. (n.d.). Monetary Policy Framework. BankofEngland.co.uk. [Online] Available from: http://www.bankofengland.co.uk/monetarypolicy/Pages/framework/framework.

aspx [Accessed 6 March 2014] BBC (2014). Fall in eurozone inflation rate fuels deflation concerns. BBC News Business. [Online] Available from: http://www.bbc.co.uk/news/business-25976377 [Accessed 6 March 2014] Bruce, A. and Milliken, D. (2014). UK inflation undershoots Bank of England target for first time since 2009. Reuters. [Online] Available from: http://uk.reuters.com/article/2014/02/18/uk-britain-inflation-idUKBREA1H0FP20140218 [Accessed 6 March 2014] Cadman, E. (2014). UK inflation falls below Bank of England target of 2%.

Financial Times. . [Online] Available from: http://www.ft.com/intl/cms/s/0/b7b2a6d6-9881-11e3-a32f-00144feab7de.html#axzz2vJmGMf9s [Accessed 6 March 2014] European Central Bank (n.d.). The definition of price stability. ECB.Europa.eu. . [Online] Available from: http://www.ecb.europa.eu/mopo/strategy/pricestab/html/index.en.html [Accessed 6 March 2014] Haldane, A.. (2000). Targeting Inflation: The United Kingdom in Retrospect. IMF. [Online] Available from: https://www.imf.org/external/pubs/ft/seminar/2000/targets/strach7.

pdf [Accessed 6 March 2014] Hammond, G. (2009). Inflation Targeting in the UK. Bank of England. [Online] Available from: http://www.bcb.gov.br/pec/depep/seminarios/2009_xisemanualmetasinflbcb/arquivos/2009_xisemanualmetasinflbcb_gillhammond.pdf [Accessed 6 March 2014]