BoE writes to Chancellor for breaching its inflation target

Under the UK monetary policy framework, Bank of England Governor is supposed to write to the Chancellor if BoE deviates from its inflation target of 2% by more than 1 %. The letter explains why it happened and what BoE would do?

In their 11 year framework, the Governor has written this letter twice, both within a year. First time in April 2007 when inflation for March 2007 touched 3.1% and second now in June 2008 when May inflation touched 3.3%.

The recent Governor letter is here and Chancellor’s reply is here. Chancellor agrees to Governor’s letter and calls it a global worry. Not much he can do anyways. The Gov. letter is more interesting:

Why has inflation increased? The Gov says because of unanticipated rise in prices of fuel, food, gas and electricity? But why was it unanticipated? It has been expected for a while.

Then is the BoE policy action to control inflation. It says it has cut rates three times since December (yes to manage inflation it has cut rates) as it is balancing 2 risks: slipping growth and rising inflation. It perceives falling growth to take care of rising inflation.

Further, the letter says inflation is expected to be around 3.5% for a while now (so we should expect more of such letters, which Chancellor also acknowledges).