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January 1, 2013 5:32 pm
The coming change of leadership at the Bank of England has prompted a growing willingness among economists to give up the 2 per cent inflation target, although a majority still thinks the chancellor will and should stick with the status quo.
Hardly discussed a year ago, almost 40 per cent of the 94 economists surveyed by the Financial Times said the government should change the monetary policy remit.
The new thinking follows the appointment in November of Mark Carney as the next BoE governor and his subsequent speech in favour of more radical monetary policy action, including targeting nominal income. George Osborne, chancellor, has welcomed the debate.
The new thinking is most evident among former members of the BoE’s monetary policy committee. Ten replied to the FT’s survey of which five said there should be a change in remit.
A 34-to-21 majority of economists still thinks the Treasury will keep the 2 per cent inflation target it gives the BoE each year. But many economists advocated a debate on the issue, recognising that the BoE’s pre-1997 belief that securing stable inflation guaranteed a stable economy was at the heart of the policy mistakes that led to the recession.
Richard Jeffrey of Cazenove said: “The naïve interpretation of the MPC’s inflation remit was one of the major factors behind a policy regime that saw the MPC maintaining interest rates at levels that encouraged the build-up of debt in the economy.”
If there is a growing belief that the 2 per cent inflation target should be reconsidered, there is no consensus on what might replace it.
Former MPC member David Blanchflower of Dartmouth College favoured “an explicit targeting of the unemployment rate as the Fed has done”. Gerard Lyons, the new economic adviser to the London mayor, favoured more guidance on policy with the BoE telling markets “the preconditions in which it would raise interest rates”.
John Llewellyn, an independent consultant who advises the Treasury, said: “It is absurd blindly to target just one variable, be it inflation or whatever, in each and every circumstance.”
Kate Barker, a former MPC member, favoured changes “to ensure no repeat of the mistakes of the early 2000s, when the MPC was too focused on achieving a relatively precise, short-term inflation target”.
But the majority of economists was still against any change. Richard Barwell of RBS said: “It is ironic bordering on the absurd that people are talking about the need for reform to introduce more flexibility into the monetary policy remit when the MPC was being castigated for not raising rates to drive inflation back to target only 18 months ago.”
Jens Larsen of the Royal Bank of Canada asked why “mess around with it” when the inflation target had been successful in containing inflationary expectations. Professor Jagjit Chadha of Kent University said it was more important to get the MPC and the financial policy committee to work well together and “integrate monetary and financial analysis so that ‘bubbles’ are pricked and priced in a boom and deleveraging is managed with limited economic dislocations”.
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