INCOMING Bank of England governor Mark Carney yesterday put himself at odds with current Treasury policy by extolling the benefits of throwing out inflation targeting.
Making the inflation target flexible – giving a central bank latitude to attempt to boost output or unemployment in hard times – or even abandoning the target altogether, and moving toward nominal GDP (NGDP) targeting, could help build credibility in policymakers’ commitment to economic recovery, the Canadian rate-setter said in a Toronto speech.
This contrasts with the UK’s current monetary policy framework, which tasks policymakers with focusing solely on a strict inflation target – set at two per cent measured by the consumer prices index.
But Carney said: “To achieve a better path for the economy over time, a central bank may need to commit credibly to maintaining highly accommodative policy even after the economy and, potentially, inflation picks up.”
If that failed to bring the economy into robust recovery, he added, policymakers may need to rip up the entire framework, and replace it by considering both inflation and output through an NGDP target.