The Bank of England must remain focused on its inflation target even as it begins a series of extraordinary measures, including creating money to try to get banks to lend more, Tim Besley, a member of the Bank’s interest rate-setting committee, warned in a speech on Tuesday night.
Mr Besley emphasised the need for the inflation target to remain “credible” in the short term, even as weak growth and lower commodity prices seemed likely to drive inflation well below the Bank’s desired level of 2 per cent for an extended period.
However, there are also fears that the unprecedented level of stimulus of recent months – including cuts in interest rates to their lowest level on record, plans to create money to buy assets and increased government spending – could lead to an inflationary storm in the longer term.
“In the conduct of both monetary and fiscal policy, there is a need to maintain a disciplined approach,” said Mr Besley, arguing that inflation targeting was still desirable.
“Direct measures to prevent a sharper than desirable credit contraction should be understood and evaluated against the background of clearly defined policy objectives,” he added.
“The inflation targeting framework with independent decisions by the MPC [monetary policy committee] remains in my view a sound structure for monetary policy in the UK.”
Mr Besley underlined the need for a rebalancing of the economy as the UK headed through a downturn.
But he added to expectations of further easing of monetary policy – either through more interest rate cuts or through more unorthodox measures.
He said that loosening of monetary policy, fiscal stimulus plans by the government and efforts to ease liquidity issues at banks were all “unfinished business”.
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