Mark Carney, the incoming governor of the Bank of England, pledged on Thursday to boost the UK recovery by adopting the US practice of spelling out to households just how expansionary monetary policy was likely to remain until growth resumed.
Appearing before a parliamentary committee after flying in from his native Canada, Mr Carney stressed the need for better communication of future policy under the guise of “flexible inflation targeting”.
The comments from the governor of the Bank of Canada, who takes up his new position in July, indicate the BoE will emulate the US Federal Reserve in providing conditional guidance on how loose policy would remain until recovery was well entrenched.
The UK economy has stagnated for the past two years, faced with spillovers from the eurozone crisis, a sharp fiscal tightening and a still-troubled banking system.
The governor-designate said that such forward guidance, which would revolutionise BoE communication, was compatible with the bank’s existing 2 per cent inflation target, but there was also a need for a “short debate” on whether changing the remit was desirable.
“The bar for change is high but there should be that debate – a short debate,” Mr Carney said.
The UK Treasury, which holds the responsibility for setting the BoE’s monetary policy remit, indicated it would instigate a debate in the coming weeks.
Expectations were dashed, however, that Mr Carney might be even more radical and propose an immediate sharp loosening of monetary policy. He suggested to members of parliament that the BoE’s current monetary policy committee (MPC) had not necessarily set policy too tight to achieve what he termed “escape velocity” for the economy.
Without defining the rate of growth he hopes to be able to achieve, he said: “It is entirely possible … in fact probable that the current stance [of the MPC] is compatible with achieving escape velocity”.
He rowed back from a previous suggestion the BoE should target the level of nominal GDP, saying he was far from conviced of its merits as a monetary policy target. He also rejected suggestions from Lord Turner, current chairman of the Financial Services Authority, that the BoE should engage in money creation to finance government deficit spending. “I cannot envisage any circumstances where I could support that as a strategy,” he said.
Instead, in response to the intense debate in Britain over how to get the economy moving again, Mr Carney proposed following the Fed’s policy of maintaining or increasing stimulus until certain conditions were met. “There is merit to considering some sort of Federal Reserve-style threshold-based guidance,” with questions remaining over what the thresholds exactly should be.
The members of the existing MPC appeared to pre-empt the new governor’s words by releasing a statement alongside its decision yesterday not to change monetary policy for only the second time in its 16-year history.
The MPC statement indicated that the bank is already inclined not to tighten monetary policy even though inflation is forecast to be above the 2 per cent target for all of the next two years.
The MPs questioning Mr Carney appeared easily charmed and, although they had no formal power to reject him as governor, rushed out a statement confirming him in his new role.
Andrew Tyrie, chairman of the committee, said the evidence had placed monetary policy in “a different place” in which “it is clear that [Mr Carney] wants a lot of communication with the wider public to take place”.
Mr Carney promised he would be open with MPs and provide information, which the BoE has traditionally withheld. “Mr Carney also set out his preference for distinctive, consensus-based leadership. That will determine whether there is any meaningful change of culture in the bank,” Mr Tyrie said.
An aide to George Osborne, the chancellor who persuaded Mr Carney to leave Canada and take up the role in Britain said the performance showed he was “a class act”.
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