Chancellor open-minded about ending inflation target
Chancellor George Osborne has welcomed remarks made by the incoming Governor of the Bank of England about scrapping the inflation target to focus on gross domestic product (GDP).
Such a change in strategy would require the Bank of England to introduce new measure to stimulate the economy, even if this caused inflation to rise.
Mark Carney, who will take over from Sir Mervyn King when he steps down next year, made the remarks on Monday, in a speech at the CFA Society in Toronto.
Mr Carney, who is currently Governor of the Bank of Canada, said: ‘To achieve a better path for the economy over time, a central bank may need to commit credibly to maintaining highly accommodative policy even after the economy and, potentially, if inflation picks up.
‘To “tie its hands” a central bank could publicly announce precise numerical thresholds for inflation and unemployment that must be met before reducing stimulus.
‘If yet further stimulus was required, the policy framework itself would likely have to be changed.’
‘For example adopting a nominal GDP level target could in many respects be more powerful than employing thresholds under flexible inflation targeting,’ he continued.
Mr Osborne said that the Mr Carney’s ideas were ‘innovative’ and he was pleased they had been raised.
Inflation targeting was introduced by the majority of central banks in the 1990s.
Currently, the Bank of England’s target is to keep inflation at 2 per cent.
While welcoming the debate, Mr Osborne said the target had ‘served us well’ and said a strong case would need to be made in order to change it.
The Bloomberg monthly survey of 35 economists suggests that UK inflation will increase faster than expected in 2013-14.
Gains in the consumer price index are expected to average 2.5 percent in 2013, higher than the 2.2 percent forecast in November.