THE BANK of England must sometimes veer away from its two per cent inflation target, governor Sir Mervyn King said last night.
Consumer price inflation has stuck above two per cent for 67 of the last 76 months, reaching levels as high as 5.2 per cent.
“It would be sensible to recognise that circumstances in which it is justified to aim off the inflation target for a while in order to moderate the risk of financial crises,” King told an audience at the London School of Economics.
“The past five years of financial crisis and turmoil in the world economy have raised serious questions about the adequacy of inflation targeting,” King said, although he stressed that “the case for price stability is as strong today as it was 20 years ago” and did not call for an end to the Bank’s targeting.
But King added that the Bank should weigh up price stability alongside a target for financial stability. With hindsight, King said, the authorities could have used macro-prudential measures to mitigate the effects of the recent financial crisis.