Former Bank of England Deputy Governor John Gieve said Chancellor of the Exchequer George Osborne may alter the central bank’s remit in the budget this month, giving policy makers more room to provide stimulus.
“I think we will get the development of flexible inflation targeting,” Gieve said at a conference held by the National Association of Pension Funds in Edinburgh today. “He will allow inflation to move away from target for some time while growth comes back. I expect the chancellor to write a letter to the governor setting out how far the bank can go outside target.”
Incoming BOE Governor Mark Carney has sparked a debate about the mandate by signaling support for allowing the central bank more flexibility in meeting its 2 percent inflation goal. While Osborne is required by law to state the remit at every budget, Carney’s comments, as well as responses from Bank of England policy makers, have changed the backdrop this year. Osborne will deliver the budget in Parliament on March 20.
The Monetary Policy Committee kept its target for quantitative easing at 375 billion pounds ($561 billion) yesterday and its key interest rate at a record-low 0.5 percent. The BOE’s latest projections show inflation in breach of its 2 percent target for at least another two years.
Gieve said Carney’s arrival on July 1 may herald a more aggressive policy, including a reduction in interest rates.
“We will see some change and probably when Carney arrives we might see interest rates come down from half a percent to zero,” Gieve said. “We will see a different tone, one that is full of hope. He will say that we aren’t maxed out and we can do different things. In terms of QE, perhaps we will see buying of mortgages as well.”
MPC members have said the current U.K. framework is already flexible and allows the BOE to look through temporary inflation surges. Gieve said he would favor a change to a “dual remit” that includes sustained economic growth as well as flexible inflation targeting.
“They may say we will continue to have an expansionary policy until either we get GDP growth up to 2 percent or wage growth beginning to go above 3 or 3.5 percent,” said Gieve in an interview outside the conference hall.