Bank of England's King says time to review inflation remit

BELFAST Tue Jan 22, 2013 10:36pm GMT

The Governor of the Bank of England Mervyn King speaks to the Economic Club of New York in New York, December 10, 2012. REUTERS/Brendan McDermid

The Governor of the Bank of England Mervyn King speaks to the Economic Club of New York in New York, December 10, 2012.

Credit: Reuters/Brendan McDermid

Related Topics

Quotes

   

BELFAST (Reuters) - The Bank of England's inflation-targeting remit needs to be fine-tuned but should not undergo fundamental change, central bank governor Mervyn King said in a speech on Tuesday.

He also said that the central bank was ready to restart bond purchases or cut interest rates if needed to boost the economy, but that Britain needed more fundamental reforms if it was to exceed the "gentle recovery" he expects for 2013.

King steps down in June, and his successor Mark Carney, head of the Bank of Canada, has promoted long-term commitments to low rates, which are also in favour at the U.S. Federal Reserve.

To date the Bank has been unenthusiastic about explicit interest rate commitments, arguing its existing policy framework is clearer than other central banks'.

And Chancellor George Osborne, who ultimately decides the bank's goals, said last month that while he welcomed debate, there would need to be a strong case for change.

However, in what is likely to be his last speech to be delivered outside London, King said that it was time for the Bank and the government to think again.

"Recent actions by central banks and governments in a number of industrialised countries have raised questions about the frameworks within which monetary policy is being conducted," he said. "In the UK ... it would be sensible to review the arrangements for setting monetary policy," King said.

The changes King appears to have in mind are small, and Sam Tombs, a UK economist at Capital Economics, said his remarks may have been aimed at forestalling calls for bigger changes.

"King used his speech to pour cold water on recent clamours for a change in the monetary policy framework and ... emphasised the merits and successes of the current regime.

"However, he conceded that the current framework could be reformed ... (and) perhaps hinted that he is open to the Bank mirroring the U.S. Fed's recent guidance," he said.

In the text of his speech, King referred to the Fed's decision to state levels to which unemployment would probably need to fall to before it started to raise interest rates.

"Is there a gain from trying to quantify how the (Bank's) Monetary Policy Committee should manage the trade-off between growth and inflation in the short run?," King asked.

"How much discretion to give to the MPC and how much should remain with the Chancellor is an interesting question that was raised, but not fully resolved, in 1997," he said, referring to the date when the Bank gained operational independence.

King said Osborne may want to be more explicit about how fast the central bank is expected to return inflation to target.

INFLATION OVERSHOOT

Inflation has been above its 2 percent goal since December 2009, and King said he expected it to remain so for most of 2013. The central bank's forecasts do not see it firmly back at 2 percent until the second half of 2014.

This is in line with the bank's current interpretation of its mandate, under which it sets monetary policy to get inflation to 2 percent within 2-3 years.

In his comments about the more immediate outlook for British monetary policy, King left his options open, though his remarks are unlikely to change economists' expectations that the central bank will not add to its 375 billion pounds of asset purchases any time soon.

"We are ready to provide more stimulus if it is needed," King said, adding the bank would continue to assess whether to cut interest rates again, something it has resisted since March 2009 lest it hurt fragile banks or building societies.

Although inflation was likely to remain above target for most of 2013, the MPC could look past this while it was driven by semi-regulated prices such as university tuition fees rather than market-generated price rises, King said.

Nonetheless, more asset purchases or rate cuts would not be enough to get Britain's economy back on track.

"Relying on generalised monetary stimulus alone ... is not a panacea," King said.

Britain's economy shrank about 6 percent in the 2008-09 financial crisis, and has recovered much more slowly than its peers. Growth in the last three months of 2012 was likely to have been "considerably weaker" than in the previous quarter, continuing a trend of zig-zagging growth rates, King said.

A more solid recovery required three things, King said, citing supply-side reforms, stronger euro zone growth and restructuring Britain's banks.

(Editing by Ron Askew and Louise Ireland)

FILED UNDER:
We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/
Comments (1)
DR9WX wrote:
Inflation is natural. Deflation is natural.

We get natural deflation when, over time, the population become more productive.

That is why we have the Bank of England, to synthesise permanent inflation.

The increasingly productive mans gift to society is deflation.

A portion of the productive mans productivity is stolen by the Bank / Govt machine by creating unnatural inflation.

I could go on but suffice it to say, when the Bank of England are targeting 2% inflation then that is the amount that they are intending to steal from us.

E.G.
Last year productivity rose 2%. This equates to 2% deflation. However, we got 2.5% inflation. Thus the Bank/Govt entity stole 4.5% of our productivity. Thanks Sir King, for not stealing more.

Is it stealing if we don’t notice? Is it stealing if it’s legal?

Have a good one.

Jan 22, 2013 9:49pm GMT  --  Report as abuse
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.