Bank of England governor hints at inflation target upheaval

The outgoing governor of the Bank of England (BoE), Mervyn King, has said it may be time to review the UK’s inflation target, but rejected a suggestion by his successor that central bankers should abandon inflation targeting altogether in times of economic crisis.

King (pictured), who steps down at the end of June, pointed out it had been more than two decades since the UK’s existing inflation target of 2% was introduced. “It has now come of age,” he said. “It would be sensible to review the arrangements for setting monetary policy.”

But King added that retaining a target was an important ingredient for economic growth.

It follows a suggestion by Mark Carney, the current Bank of Canada governor who takes over from King on 1 July, for alternatives to targeting low inflation, though he said his remarks were not country-specific.

Carney proposed an alternative mandate for “nominal GDP”, a measure of total growth before adjusting for inflation, in times of economic crisis. He also suggested fixing interest rates until unemployment hit “precise numerical thresholds” in downturns.

But King, speaking at a Confederation of British Industry dinner in Belfast, said: “To drop the objective of low inflation would be to forget a lesson from our post-war history.”

In one of his last speeches as BoE governor, he added: “In the 1960s, Britain stood out from much of the rest of the industrialised world in trying to target an unrealistic growth rate for the economy as a whole, while pretending that its pursuit was consistent with stable inflation.

“The painful experience of the 1970s showed that this illusion on the part of policymakers came at a terrible price for working men and women in this country.”

Inflation has been above its 2% target since December 2009, and King said he expects it to remain so for most of 2013.

 

This article was first published on IFAonline

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