King: keep UK’s target for inflation

Julian Harris
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BANK of England chief Sir Mervyn King last night welcomed new ideas over the role of central banks in the post-crisis era, but warned against scrapping Threadneedle Street’s inflation-targeting remit.

Incoming governor Mark Carney has floated the possibility of switching to a nominal GDP target, but Sir Mervyn – who steps down in June – told business leaders in Belfast that targeting inflation still has merit.

“A long-run target of two per cent inflation should be an essential part of our macroeconomic framework,” Sir Mervyn said. “And it is interesting to note that within the past year both the Federal Reserve and the Bank of Japan have adopted a target for annual inflation of two per cent.

“The anchoring of inflation expectations has been the most successful aspect of the inflation targeting regime and it has allowed the Bank to avoid an unnecessarily damaging tightening of policy in response to short-run movements in inflation. It would be irresponsible to lose that.”

In a possible swipe at overly-ambitious monetary regimes, Sir Mervyn said: “Wishful thinking can be indulged if the costs fall on the dreamers; when the costs fall on others, it is unacceptable.”

Yet the governor hinted that the UK’s fourth quarter GDP figures may be bad, and that more quantitative easing could be in the pipeline.

“Be in no doubt that we are ready to provide more stimulus if it is needed,” Sir Mervyn said on the possibility of more asset purchases, before adding later in the speech: “Growth in quarter four will almost certainly turn out to have been considerably weaker than in quarter three.”