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Rampant inflation paired with stalled growth has left the Bank of England in a complex situation. The MPC has soften its hawkish outlook as the U.K. economy is on the verge of a recession, with Governor Mervyn King softening his hawkish outlook as he reiterates the downside growth risks for the economy.

BOE: Downside Growth Risks Come Into Focus As Hawkish Rhetoric Softens

Rampant inflation paired with stalled growth has left the Bank of England in a complex situation. The MPC has soften its hawkish outlook as the U.K. economy is on the verge of a recession, with Governor Mervyn King softening his hawkish outlook as he reiterates the downside growth risks for the economy.

Mervyn King, Bank of England Governor

			“The downside risk to growth poses a downside risk to inflation at the two-year horizon.”
			“…I've tried very hard for the last five years to get people used to the idea that there will be movements of inflation both up and below the target.”
			“What is unique about the present set of circumstances is that both shocks have occurred at the same time. And the combination of those two shocks, which have originated primarily in the rest of the world economy, have meant that life is extremely difficult and will be for the UK economy over the next year.”

Charles Bean, Bank of England Deputy Governor

			“It has been very much ebb and flow and the mood here is very much one of financial caution as regards the next year. We have our fingers crossed but there is the recognition there is still quite a long way to go yet.”
			" Last year this was a financial crisis that we thought with a bit of luck would be over by the time of Christmas, but it has dragged on for a year and looks like it will drag on for some considerable time further yet."
			" On the assumption commodity prices remain stable and if anything fall back, then inflation should drop back as we go through next year."

US Fed: Hawkish Commentary Continues

The latest commentary from the Federal Reserve continues to focus on upside inflation risks, but has yet to warrant expectations of a rate hike to follow in the coming months. Chairman Bernanke noted that upside inflation risks remain uncertain for the US economy, but expect inflation to ease over the coming months as commodity prices continue to fall back from record highs. Futhermore, the FOMC appears to hold a neutral policy stance for the time being as the economic slowdown may help to limit upside inflation risks.

Ben Bernanke, Federal Reserve Chairman

			" If not reversed, these developments, together with a pace of growth that is likely to fall short of potential for a time, should lead inflation to moderate later this year and next year. Nevertheless, the inflation outlook remains highly uncertain, not least because of the difficulty of predicting the future course of commodity prices, and we will continue to monitor inflation and inflation expectations closely. "
			“The FOMC is committed to achieving medium-term price stability and will act as necessary to attain that objective.”

Richard Fisher, Federal Reserve Bank of Dallas President

			“The real concern I have as a central banker is whether or not (inflation) begins to affect the mentality of spending patterns by consumers (and) pricing patterns by producers.”

ECB: Growth Fears Spark Regulatory Changes, But the Hawkish Outlook Remains

Instability in the financial sector has led the ECB to announce regulatory changes regarding money-market auctions, but has failed to discourage the hawkish rhetoric held by the central bank. The ECB remains focused on its primary mandate to ensure price stability throughout the 15 European nations, but may keep the benchmark interest rate on hold as economic activity continues to weaken.

Axel Weber, European Central Bank Governing Council Member

			“I don't think we'll be back to inflation readings of below 2 percent this year or next.”
			“The medium-term perspective for the European economy in my view is still in tact.”

Yves Mersch, ECB Governing Council

			"At the margins there can still be cases where you see dangers of gaming the system. The Governing Council has been discussing the whole issue."
			“We are satisfied with our framework. But since there are always on the margins evolutions, we have to adjust our framework regularly to market practices.”

Klaus Liebscher, ECB Council Member

			"We will see a protracted period of time where inflation will stay well above the level of price stability."
			“We live in an environment which is characterised by a very high degree of volatility and it is very difficult to predict whether this decline in oil prices is going to continue or, (it will reverse) if we get a new geopolitical tension, or a new hurricane or other events which you cannot predict.”

Mario Draghi, European Central Bank Governing Council Member

			“For a central bank whose primary objective is to preserve price stability alone, introducing financial stability as an additional objective could introduce a trade-off where none exists today.”
			"Actually at times of extraordinary volatility and dramatic risk repricing, maintaining price stability could be the best contribution that monetary policy could give to the return to financial stability.”