BIRMINGHAM (Reuters) - The Bank of England may have more scope to boost the economy after Mark Carney starts as governor because of tentative signs of lower inflation ahead, a member of its policymaking body said on Friday.
Chancellor George Osborne has given Canadian Mark Carney, who starts as the next governor in July, the task of reviewing whether Britain should give more detailed guidance on future monetary policy, considered a way to help growth.
Martin Weale, who serves on the Bank’s rate-setting Monetary Policy Committee, said on Friday the central bank’s ability to support demand had recently been constrained by its need to keep public confidence in its commitment to get inflation back to 2 percent.
Inflation has exceeded its target for most of the past five years, something Weale said made him - and the majority of the MPC - reluctant to approve more economy-stimulating bond purchases.
“Failure to damp sufficiently any new shock pushing up on inflation would result in inflation expectations becoming more entrenched. That, in my view, limits the scope we have to support demand at the current juncture,” Weale said in a speech.
However, things may be starting to change. Earlier this week the central bank forecast inflation would fall faster than it predicted three months ago and that growth this year would be a shade higher.
“The situation does look as though it is getting rather better at the moment, both in terms of what looks like an improving growth outlook and possibly ... inflation pressures may be somewhat weaker than they have been,” Weale said in a question-and-answer session after his speech.
“So it is quite possible that (Carney) will be coming to the Bank at a time when there is more room for manoeuvre than there has been for some time,” he added.
Osborne, when he revised the mandate of the MPC in March, set out more clearly the trade-offs he expects policymakers to make between their inflation target and helping Britain’s economy to grow more strongly.
The change in the wording was seen as paving the way for Carney to take a more aggressive approach to getting growth going again after he begins work.
In his current role running the Bank of Canada, Carney has advocated that central bankers make long-term commitments to low interest rates similar to the U.S. Federal Reserve, conditional on unemployment staying high and inflation being low.
Weale noted that Britain’s inflation had been above target much more often than in the United States, and warned that labour market bottlenecks were a more common source of inflation than in other countries.
He declined to comment on whether he would back a change in Bank policy to make more formal commitments to low rates - something Weale has questioned in the past - saying only that the central bank was researching the issue.
However, he did note there was a “strong steer on future interest rates” in the BoE’s bank’s latest economic forecasts, which showed market interest rates could stay very low until 2016 while still allowing inflation to return to 2 percent.
Weale added that he saw signs that the British economy was recovering its footing.
“No one can be certain but it is possible that the near-stagnation of the past three years is being replaced by a move to modest growth,” he said in his speech to a conference organised by the British-American Business Council.
Reporting by David Milliken Editing by Jeremy Gaunt.