The Bank of England published Staff Working Paper No. 1,109 examining how monetary policy affects inflation expectations in the United Kingdom, using distribution-based measures for households, firms, professional forecasters and financial markets. The paper finds that tightening shocks are associated with an overall decline in inflation expectations, but with materially different reactions across groups. Using higher moments of inflation-expectations distributions to build summary measures and estimating a Bayesian vector autoregression identified with a high-frequency monetary policy shock series, the analysis shows firms’ and financial market median expectations falling after a tightening, while households’ inflation expectations rise. It also documents that monetary policy decisions act as a stabilisation mechanism by reducing the dispersion of inflation expectations 12–18 months after a shock. The working paper is described as research in progress published to elicit comment and debate and does not represent Bank of England policy or the views of its committees.
Bank of England 2025-01-01
Bank of England staff working paper finds UK monetary tightening lowers firms’ and market inflation expectations but raises households’ expectations
The Bank of England released Staff Working Paper No. 1,109, analyzing the impact of monetary policy on inflation expectations in the UK. The study finds that tightening shocks generally lower inflation expectations, with varied responses among households, firms, and financial markets. The paper highlights monetary policy's role in stabilizing inflation expectation dispersion 12–18 months post-shock.