Inflation Expectations and Monetary Policy Regime Changes

Bank of England News

Published March 20th, 2026

Detected March 21st, 2026

Summary

The Bank of England has published Staff Working Paper No. SWP 1,175, which examines how inflation expectations respond to changes in monetary policy regimes, specifically inflation targeting. The paper uses a New Keynesian model and survey data from 32 countries to analyze the relationship between policy announcements, realized inflation, and expectations.

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What changed

This document is a Bank of England Staff Working Paper (SWP 1,175) titled 'Targeting inflation expectations?', published on March 20, 2026. The paper develops a New Keynesian model with adaptive learning to study how inflation expectations adjust to monetary policy regime changes, particularly the adoption of inflation targeting (IT). It contrasts rational expectations with adaptive learning, suggesting that under adaptive learning, expectations adjust gradually. The empirical analysis uses professional forecaster surveys from 32 countries, exploiting staggered IT adoption to observe inflation and expectations around these transitions.

The findings indicate that inflation tends to decline following IT adoption, while survey expectations show little systematic adjustment, implying that inflation leads expectations. This challenges the canonical rational-expectations prediction. The paper suggests that central bank credibility can be built over time as policy consistently delivers lower inflation outcomes after IT adoption. This research is presented as ongoing work intended to encourage comments and debate, rather than a final policy directive.

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Targeting inflation expectations?

Staff working papers set out research in progress by our staff, with the aim of encouraging comments and debate.

Published on

20 March 2026

Staff Working Paper No. SWP 1,175

By Mridula Duggal

This paper studies how inflation expectations respond to monetary-policy regime changes. I develop a New Keynesian model with trend inflation and adaptive learning in which adopting inflation targeting (IT) is a downward shift in the central bank’s inflation objective. Under rational expectations, expected inflation adjusts on impact. Under adaptive learning, beliefs update gradually and expectations adjust only partially between announcement and implementation. I then use professional-forecaster surveys for 32 countries and exploit staggered IT adoption to trace expectations and realised inflation around regime transitions. Empirically, inflation declines following adoption, while survey expectations exhibit little systematic adjustment. The results indicate that inflation leads expectations, at odds with the canonical New Keynesian rational-expectations prediction, and imply that – following the adoption of IT – credibility can be built over time as policy delivers lower inflation outcomes.

Targeting inflation expectations?