Uncertainty is an unavoidable element of policy decisions. In the words of the great Donald Rumsfeld, we must confront the unknown unknowns. In this appearance the BoE’s chief economist, Spencer Dale, discusses his approach to dealing with uncertainty in the context of forward guidance. Essentially, he says that the Bank doesn’t know how big the output gap is so it has been cautious with forward guidance. He suggests that any other course of action would risk pushing up inflation expectations.
His view is understandable, given the Bank’s inflation target, but it is probably not optimal for the UK. Read more