The MPC meets on June 6 and 7, their fifth meeting to decide the course of monetary policy and exchange rates. Over its last four meetings, the MPC has flip-flopped on various issues of policy and inference; this meeting is a chance for the MPC to redeem itself.
Consider this. At its first demonetisation meeting on December 7, the MPC concluded that demonetisation was temporary and so, it should look through its effects on dampening inflation and growth. It expected inflation and GDP growth to hustle up in a “V-shaped” pattern. The reality — GDP growth has been flat at 7 per cent, inflation has followed just the first half of the V. The MPC’s post-demonetisation short-term three-month forward forecast for March 2017 was 5 per cent with an upside bias. Actual March 2017 CPI inflation — a low 3.5 per cent! Actual April CPI inflation — 3 per cent. I have searched far and wide but not found any central bank, or even an amateur economist, with such a large forecast error for a three-month projection. These forecast errors are liable to get worse.