Should the Bank of England scrap its two per cent inflation target?
Yes – Matt Kilcoyne is head of communications at the Adam Smith Institute.
Inflation is an imperfect target to deliver stability of money supply, as it is affected by both demand factors (which the Bank controls) and supply factors (which the Bank can’t control, like oil price shocks).
Policymakers are trained to “look through” supply-shocks, and by and large they have managed to in the UK. But it is imperfect and it is fallible, relying on the collective wisdom of the eight men and one woman of the MPC. We are now in the position where, for a decade, we have relied on them failing to meet their principal target of inflation to keep us from being worse off.
All of this has created a climate of uncertainty, and muted the financial market response to policy changes.
Let’s move to targeting nominal GDP (a measure made up of GDP plus inflation). It would mean higher inflation during a recession and lower inflation when productivity growth surges.
Scrapping inflation targets and moving to nominal income could take the guesswork out of monetary policy – something we should all welcome.
No – Bhavin Patel is an economist at OMFIF.
Promoting long-term economic growth through low and stable inflation is a primary concern for central bankers.
Inflation targeting has historically proven to be the regime best suited for achieving this objective, its key appeal lying in its clarity in terms of anchoring the market and the public’s inflation expectations, to the target rate of two per cent. This makes the Bank’s policy reaction function predictable and well-understood.
It would be tempting in the current environment, when global supply-side and exchange rate factors have become more influential in determining inflation, to question the effectiveness of a regime that instructs a specific reaction irrespective of the sources and type of inflation. However, such factors are likely to reverse soon.
Moreover, there are other ways to introduce flexibility. The Bank of England could, for example, redefine its “medium term” while maintaining the two per cent target. The much-praised alternative of targeting nominal GDP is also problematic, due to lack of transparency and the frequent revisions of nominal GDP data.