"To return inflation to target, the Monetary Policy Committee’s first line of defence is to dampen expectations of future price increases."
In the last half of 2021, UK CPI inflation surged, more than doubling from 2% in July to 5.4% in December.
Catherine noted that global factors have been at the forefront of the inflation surge in the UK, and predicts that "their effects will persist into early 2022".
However, she says expectations for wages and prices for this year, if realized, could keep UK inflation strong for longer.
Catherine added: "To return inflation to target, the Monetary Policy Committee’s first line of defence is to dampen expectations of future price increases. Achieving an inflection in these expectations along with tailwinds from global factors could mean that a shallower path of future rate rises is needed to bring inflation back to target."
Going into 2022, Catherine says current price and wage expectations are inconsistent with the 2% target, and "if they are realized in 2022 are likely to keep inflation strong for longer".
She said: "In my view, the objective for monetary policy now should be to lean against this 'strong-for-longer' scenario, but at what time horizon and using what tool?
"Inflation rates in the very near term are mostly a matter of arithmetic, not one of policy. What monetary policy needs to do now is to temper the 2022 expectations for wage and price increases to prevent them from being embedded in the decision-making of firms and consumers."
Catherine conclude: "The path for monetary policy must have the medium-term objective of steering the economic and financial environment in which expectations, wages, and prices evolve so as to reach the 2% target. To the extent that monetary policy actions now dampen expectations, and to the extent that any deceleration of global prices is passed-through to UK inflation, and to the extent that financial markets are already cautioning decisions, the next steps could exhibit a shallower path.
"Lastly – a teaser. In addition to the external forces of demand and supply that have loomed large in the evolution of UK inflation in 2021, going forward there is another important external factor relevant for UK economic performance. Policy actions by other central banks have cross-border ramifications which will be important for the Committee to consider. But that is a topic for another speech."
