LONDON When George Osborne stands up in parliament to deliver his annual budget next week, a usually routine passage will grab most of the attention: his marching orders for the Bank of England.
New instructions to the central bank for the first time in nearly a decade - if they give room to loosen monetary policy further - may be the best response the British Chancellor has to a crescendo of calls to do more for an economy that could already be in recession again.
On spending and taxes, his hands are largely tied by a determination to lower the budget deficit and public debt.
Though some economists argue debt would be easier to cut if more was done to boost growth, the government is sticking to its guns, not least because to otherwise would require a dramatic policy U-turn.
Former Bank of England (BoE) policymakers and economists say a fresh remit is overdue after huge changes were forced on the bank by the deepest financial crisis in generations.
But barring a surprise, Wednesday's announcement is unlikely to pave the way for a big shift in policy, they say.
The BoE has already taken a flexible approach to its remit to target inflation of 2 percent. Price growth has run above target for most of the of the last five years as the bank sought instead to prop up the economy.
To reflect that, Osborne might seek - possibly after a review - to drop words in the bank's remit that prioritise price stability over growth and employment, which is a secondary goal.
"It's not a minor change because it really does materially raise the risk of higher inflation," said Willem Buiter, a former BoE policymaker and now chief economist at Citi.
He favours keeping the remit unchanged to avoid any risk of stoking prices in a country where annual inflation hit 25 percent in the mid-1970s.
"But if that's what you're doing in any case, clarity and honesty are always better than obfuscation and pretence," Buiter told Reuters.
The central bank justifies its approach of aiming to get inflation back to target within 2-3 years with the fact that the remit also calls on it to avoid "undesirable volatility in output" when shocks hit the economy.
Osborne argues that to loosen up on austerity would risk a market backlash but the same could apply to a central bank remit which allows for significantly higher inflation.
If investors fear their returns will be eroded, they could rob Britain of one of its main advantages - ultra-low government borrowing costs - particularly when the bank eventually stops buying gilts with newly minted money.
"That's a risk that is very much alive for the gilt market," said Sam Hill, fixed income strategist at RBC Capital Markets. "It is a constraint. It means (Osborne) is more likely to take baby steps on the remit change."
CALLS FOR CHANGE ARE GROWING
The government first instructed the BoE to target inflation in 1992. The bank was granted operational independence over monetary policy in 1997 and its mission has remained little changed since then, apart from a tweak to the targeted measure of inflation in 2003.
Calls for a rethink are growing as the UK economy struggles to show any growth more than five years after the start of the financial crisis while inflation has consistently exceeded the two percent target.
Bank of Canada Governor Mark Carney, who takes over the BoE in July, wants a debate on the BoE's remit.
Investors have already responded to what they see as the prospect of a less inflation-focused Bank of England.
Prices of inflation-linked government bonds rallied sharply and real yields hit record lows in the past week. The prospect of the BoE, free to pump more money into the UK economy, has also weakened the pound to 2-1/2 year lows against the dollar.
"The market appears to have almost fully priced a change to the MPC's remit," Citi strategist Jamie Searle said.
But Buiter cautioned that a change to reflect what the bank is already doing did not, on its own, mean more stimulus was imminent although he expected the central bank to start buying government bonds again soon to add to the 375 billion pounds it has already spent since 2009.
"I think operationally it will make very little difference," said Buiter, who served on the BoE's Monetary Policy Committee between 1997 and 2000.
NEW REMIT, A REVIEW OR DO NOTHING
Osborne may disappoint some expectations by announcing the launch of a review. That would create the time for changes to be made after Carney's arrival in July. Or he may do nothing.
Other possibilities are to order the BoE to use a new and slightly lower measure of inflation for its target; explicitly give the BoE more time to bring high inflation back under control; or replace the target rate with a 1-3 percent range.
More radical options, such as setting a numerical target for cutting unemployment, the approach taken by U.S. Federal Reserve, appear too controversial for a country which has made inflation-targeting the anchor of economic policy for decades.
Bank of England chief economist Spencer Dale said on Friday he was open to improvements of the central bank's remit but warned against what he saw as "a sense that inflation is somehow yesterday's war. That central banks should focus more on growth. That a period of higher inflation may even aid the recovery. This is dangerous talk."
Both Osborne and Carney have stressed there should be a high bar for any changes in the remit.
Andrew Sentance, a Monetary Policy Committee member for five years until 2011 and a critic of the bank's aggressive stimulus, said attempts to further loosen monetary policy would look like desperation on the part of the government which is struggling to cope with deeper structural problems in the British economy.
Consumers risked further punishment by a weakening of the pound which would push up inflation further without helping exports, said Sentance, now senior economic adviser to PwC.
"To my mind moving the target to give Carney or the MPC room to provide even more monetary stimulus and stoke up inflation is going in the wrong direction," Sentance told Reuters. "We should be moving toward an exit strategy."