King versus Carney: in a world awash with liquidity, inflation forecasting becomes less certain

The long-term effects of quantitative easing (QE), especially on inflation, are an unknown. With conventional policy we have a history to look back on. With QE it’s all new. There is no history. This means that while central governments may have got it right, the reality is no one can be sure.

Indeed, central banks themselves no longer seem confident what could happen. Consider their inflation forecasts. The first chart above depicts the Bank of England’s inflation forecast in 2005 under former governor Mervyn King. In contrast, a more recent prediction under the aegis of current governor Mark Carney shows a far wider range of possible outcomes. In a world awash with central bank-initiated liquidity the old certainties would appear to be breaking apart. It’s not an exaggeration to say Central Banks are not really sure of the implications of their actions – or whether they will create the right outcome.

David Hooker – Insight, a BNY Mellon company

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