The UK Government sets a 2% inflation target for the Bank of England. The target gives monetary policy a clear reference point: prices should rise slowly enough to preserve stability without pushing the economy towards persistent deflation.
Why not zero?
A small positive inflation rate gives wages and prices room to adjust and reduces the risk that falling prices become entrenched. The target is therefore intended to provide price stability rather than eliminate price increases altogether.
How Bank Rate connects to the target
When inflation is expected to remain too high, the Bank of England can raise Bank Rate to make borrowing more expensive and reduce demand. When inflationary pressure is weak, lower rates can support spending and investment. The effects arrive with delays, which means policy decisions depend on forecasts as well as current data.
The trade-off is not mechanical
Interest rates cannot directly produce more gas, food or imported goods after a supply shock. Monetary policy instead tries to prevent temporary price increases from becoming persistent through wages, expectations and wider demand.
That is why returning inflation to 2% can involve difficult choices. Tightening policy too little risks persistent inflation; tightening too aggressively can weaken investment, employment and household finances.
Read the Bank of England’s explanation of inflation and the 2% target.
