Flexible inflation targeting
Monetary policy - central bank independence - interest rates - inflation - inflation targets.
Operationally independent central banks generally work with an inflation target set by the central government in their jurisdiction.
The central bank then adjusts interest rates and other tools of monetary policy to work toward the target rate of inflation.
A "flexible" approach to inflation targeting means that the central bank will also work toward full employment and appropriate rates of economic growth.
Under flexible approaches, the central bank - and government - will tolerate periods of above-target inflation, in order to support employment and growth.
For example, during a period of above-target inflation, interest rate rises may accordingly be smaller - or deferred - in order not to damage growth and employment.
- UK government committed to flexible inflation targeting
- "The [UK] Government's commitment to the Bank of England's operational independence and the current regime of flexible inflation targeting remains absolute.
- The [2% CPI inflation] target is symmetric: deviations below the target are treated in the same way as deviations above the target.
- This institutional structure helps to ensure that inflation expectations remain anchored and that monetary policy can play its role fully."
- Letter from UK Chancellor of the Exchequer to Governor of Bank of England - December 2021.
