Bank of England Deputy Governor Charles Bean said it may be appropriate to review the U.K.’s inflation-targeting regime, and that policy makers stand ready to take further measures to boost the recovery if required.
“I think it is sensible to review the framework to assess whether it is fit for purpose or can be materially improved, though the hurdle for change should be high,” Bean said in a speech in London today.
Bean said while the BOE is ready to add more stimulus if needed, there is “a danger of expecting too much” from monetary policy. With the arrival of Bank of Canada Governor Mark Carney in July to replace Governor Mervyn King having raised the topic of the potential limits of inflation targeting, Bean said the current U.K. inflation framework is already flexible and incorporates growth and employment.
“We stand ready to take further such action should it be warranted,” Bean said. “But such policies cannot -- and should not seek to -- prevent the necessary de-leveraging and rebalancing. That is a real process that takes time and means that the recovery is likely to remain somewhat subdued by historical standards.”
British gross domestic product dropped 0.3 percent in the fourth quarter, according to a second estimate released today.
The Monetary Policy Committee has said it will “look through” above-target inflation to help the U.K. economy recover from a recession. At 2.7 percent in January, inflation is above officials’ 2 percent target and forecast to remain there for another two years.
The deputy governor said while a switch to targeting nominal-income growth would not represent “a major change,” there were drawbacks, including historic revisions to growth data and the risk that the public would not understand what policy was trying to achieve. He added that an income-level target may keep policy too loose for too long, risking asset bubbles.
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