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EDMONTON, Alberta (Reuters) - The next Bank of England governor, Mark Carney, endorsed on Wednesday the idea of sometimes letting inflation run above target for longer than normal, while also warning of the risks to credibility if this is taken too far or done too often.
Carney, governor of the Bank of Canada till June 1, sang the praises of flexible inflation targeting, saying tighter monetary policy might be needed to prevent imbalances from developing and looser policy might be needed to avoid further damage to the economy.
The Bank of England has let inflation run above its 2 percent target even while it pursues an extraordinary amount of monetary easing, keeping interest rates at 0.5 percent for four years and engaging in buying massive amounts of government debt in a bid to spur economic growth.
"The weakness of growth since quantitative easing was introduced is not itself a reason to doubt that it is an effective policy," he said in a lengthy lecture in Edmonton, Alberta, examining the lessons learned from five years of financial turmoil.
But he acknowledged limits to flexible targeting. "The time frame for returning inflation to target can be stretched, but the credibility essential for the success of such a tactic could be undermined if such flexibility is taken too far, deployed too frequently or undertaken by stealth," he said.
Carney said asset purchase programs by the U.S. Federal Reserve and the Bank of England have had positive effects on financial markets, but that it was more difficult to judge how these effects were transmitted to the broader economy.
He made no specific remarks about whether the BoE should expand its asset purchase program or pursue other forms of unconventional policies. Nor did he provide any new guidance on Canadian policy, other than to repeat that household debt levels were stabilizing, in part due to the bank's rate-hike talk since last April.
He said central banks that have provided forward guidance, such as the Fed's policy of setting a threshold for unemployment, have helped provide further stimulus to economies. Such policies, which are now being debated in Britain, can lead to lower long-term nominal rates and reinforce their stimulative effect, he said.
While price stability should remain the primary objective of monetary policy it does not guarantee financial stability and might even promote financial instability over the medium term, Carney said.
The lecture was his penultimate speech as Bank of Canada governor before he steps down to run the Bank of England starting in July. Carney's successor is expected to be named shortly.
Reporting by Louise Egan and Randall Palmer; Editing by Lisa Shumaker