20th March 2013
The Bank of England’s remit has been changed by the Chancellor of the Exchequer George Osborne although crucially the inflation target of 2 per cent of the Consumer Price index remains the same.
The Chancellor will now require the Bank of England to set out clearly the “trade-offs” it has made in deciding how long it will be before inflation returns to target, an acknowledgement of just how frequently the Bank has been missing that target.
Some experts are speculating that the MPC may now consider issues such as unemployment or GDP growth.
The move also involves changing the timing of letters that the Bank of England Governor must write to the Chancellor when the inflation target is missed. These letters have become a regular occurrence, but the Chancellor wants to leave room for more of his response.
The move could alarm some who believe that the ‘independence” of the Bank is breaking down.
Osborne said: “To ensure a fuller communication between the Bank and the Treasury, I am changing the timing of the open letter system so that when inflation is above target, the Governor will write to me on the day the minutes of the next MPC meeting are published to allow for a more substantive exchange of views.”
The new remit also recognises that the Monetary Policy Committee may need to use unconventional monetary instruments to support the economy while keeping inflation stable.
It also says that the Committee may wish to “issue explicit forward guidance” including using intermediate thresholds in order to influence expectations on the future path of interest rates.
This is an expected development and follows the thinking of many financial experts suggesting that by giving greater indication of the future direction of interest rates, it can foster a more stable environment for businesses.
This borrows strongly from the US. As the Chancellor said: “That is what the US Federal Reserve has now done – making a commitment to keep interest rates low while unemployment is high, provided inflation is not expected to rise too much. This can help the economy because it gives families planning their futures, and businesses wondering whether to invest, more confidence that interest rates will stay lower for longer.”
The MPC has been asked to give an assessment of how this might work in the UK and to start the assessment in April under tenure of Mervyn King though it will report in August on the watch of King’s successor Mark Carney.
What remains to be seen is whether this means that the UK could move to an explicit or semi explicit target for employment as is the case with the US or perhaps for GDP growth, which is arguably more of a concern in the UK. This week’s unemployment figures showed a small rise but it remains better than might have been expected in this period of low growth. No doubt economists are already starting to debate the matter.