Carney Says Policy Must Achieve ‘Escape Velocity’
In comments that may shed light on his thinking as he prepares to take over the Bank of England in July, Carney said policy in developed countries isn’t “maxed out” and that central bankers can be flexible in meeting inflation goals.
The current task of monetary policy is to ensure the key economies “achieve escape velocity,” Carney told the World Economic Forum’s annual meeting on Jan. 26 in Davos, Switzerland, identifying communication and unconventional stimulus as possible tools. “There continue to be monetary policy options in all the major economies,” he said.
While Carney didn’t specify the U.K., he said that central bankers “might take a little longer” to hit their inflation goals in economies facing budget cuts and above-target inflation. That echoes the policy of the Bank of England, which has left its key interest rate at 0.5 percent for almost four years and pursued asset purchases even though inflation has topped its 2 percent target over the period.
Carney last month sparked debate on the future of the BOE’s mandate when he said nominal gross domestic product targeting could be an even “more powerful tool” to stimulate economies, though he didn’t discuss the subject in Davos.
Bank of England Governor Mervyn King in a speech last week welcomed the debate, saying it’s “sensible” to review monetary policy arrangements. Adair Turner, chairman of the U.K.’s Financial Services Authority, will say in a speech next month that an inflation target isn’t enough to promote growth, the Sunday Telegraph reported yesterday without saying where it got the information.
Drawing a closer parallel with Canada, Carney said in Davos that a central bank could “lean into the wind” if inflation is below target and yet there is a potential issue with household credit. That may involve keeping monetary policy tighter than otherwise would be the case.
Canada’s inflation rate was at a three-year low of 0.8 percent in December and Carney has identified consumer debt as a concern.
“Within the framework of flexible inflation targeting that exists in most of the developed economies, there remains considerable flexibility,” Carney said.
King said in a speech on Jan. 22 that the bank is “ready to provide more stimulus if it is needed.” Minutes of the bank’s Jan. 10 policy decision also showed that officials saw scope for asset purchases to lower bond yields and support asset prices, though “there remained uncertainty about their impact on nominal demand” as the economy rebalances and the banking system heals.
U.K. lawmakers will question Carney on the BOE’s quantitative easing program when he appears before the Treasury Select Committee on Feb. 7.
While monetary policy can be more “nimble” than fiscal policy, central banks alone cannot overcome economic strains, Carney said. Governments in Europe and the U.S. need to take steps too.
“There is not an ability of central banks to take all these risks out or set the seeds for a sustainable recovery,” he said.
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