Goodhart Says Carney to Shift BOE Communication Rather Than Goal
The Bank of England is more likely to change communication policy than its inflation target once Mark Carney becomes governor in July, said Morgan Stanley economists including former central banker Charles Goodhart.
While Carney, who now heads the Bank of Canada, has discussed the virtues of targeting a nominal level of gross domestic product, it is more likely the BOE would commit to keeping interest rates low over a certain timeframe and reduce them if the economy deteriorates, the economists said in a report published today.
“We can see some merit in a temporary change in BOE monetary policy towards a nominal GDP growth target,” they said. “But it would come with significant risks and does not have an academic opinion behind it. Much more likely under the new BOE governor, we think, would be changes in communication.”
Setting a timeframe for low rates would mimic a policy Carney already employed in Canada. After cutting the benchmark lending rate to a record low of 0.25 percent in April 2009, he committed to keep it there for more than a year unless the inflation outlook shifted. He abandoned the pledge early, citing faster-than-expected growth and inflation.
Bank of England policy makers will leave the benchmark rate unchanged at 0.5 percent tomorrow, all of the 50 economists surveyed by Bloomberg News predict. They will keep the asset- buying program at 375 billion pounds ($600 billion), according to a separate survey.
Chances for a rate cut will increase under Carney, said the Morgan Stanley economists including Goodhart, who is a senior economic consultant to the New York-based bank and sat on the BOE’s Monetary Policy Committee from 1997 to 2000.
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