Bank of England policy maker Ben Broadbent said the Monetary Policy Committee must maintain its inflation-targeting regime or risk losing credibility as he argued against looking at a nominal income goal instead.
“The credibility of the current regime may or may not have suffered had inflation been higher in recent years,” he said in a speech in Lancaster, England today. “But it’s hard to believe it wouldn’t have been seriously damaged -- for both the new and the old target -- had we simply switched horses in mid course.”
Broadbent said he and the rest of the MPC will continue to set policy aiming to meet the 2 percent inflation goal. His remarks follow those of Chief Economist Spencer Dale, who said in an interview with The Times newspaper published today that in coming years officials should “seriously think about” whether inflation targeting is the right framework.
Broadbent responded to criticisms of the central bank’s policy before the financial crisis struck in 2008, saying that the buildup of risk happened on a global level that the U.K. could not have escaped. While the ensuing credit squeeze ravaged the construction sector, it may now be starting on a path to recovery, he said.
“Like many others, the construction sector was a victim of a global credit crunch, not a local boom beforehand,” he said. “The creation of the Financial Policy Committee, which is explicitly charged with limiting systemic risks in the financial system, only strengthens this point.”
Funding for Lending
In part because of the central bank’s Funding for Lending program, which started in August, “the prospects for the construction sector look less unfavorable than they have been for a while,” he said. The FLS “holds out the prospect of some easing in domestic credit supply” and “if it actually resulted in more mortgage approvals, I would expect this to push up residential investment as well.”
Answering audience questions at the event at Lancaster University Management School, Broadbent said policy makers expect inflation to remain closer to the higher end of a range between 2 percent and 2.5 percent “in the near team.” Officials then predict it will start “drifting down” from next spring, he said.
“The overall judgment is that we still have spare capacity in the economy,” Broadbent said. “We can get a little more growth, but we won’t be generating inflation.”
The policy maker also said revisions to gross domestic product figures may show that Britain hadn’t experienced a double-dip recession this year.
Data “tends to get enormously revised and it’s quite possible that in 2, 3, 4 years’ time, whenever the numbers actually settle down, and it is that long before they do, they may well turn out we didn’t have a double dip,” he said. “Whether or not that number is precisely zero, slightly positive or slightly negative doesn’t really matter, but it’s worth bearing in mind.”
While productivity may have grown more slowly in construction than elsewhere in the British economy, “there’s also some evidence that the level of productivity is relatively low in the U.K., in which case there is room for further growth,” he said. There has been a “‘boomless bust’ in construction,” and “we should expect it to come to an end soon.”