BOE Inflation Target Isn’t Working and Should Change, E&Y Says

The Bank of England’s inflation-targeting regime isn’t working and the government should use the appointment of Mark Carney as governor to reassess the remit, according to the Ernst & Young Item Club.

The London-based group recommends that the Bank of England switch to a target for money gross domestic product. That would put growth “on a par with inflation as an objective of economic policy and remove the risk to its credibility that the Monetary Policy Committee runs by allowing inflation to overshoot the target,” it said.

Bank of Canada Governor Carney, who is scheduled to take over from Mervyn King at the Bank of England later this year, has discussed the virtues of a nominal GDP target as a policy tool. Bank of England policy maker Ian McCafferty said on Jan. 18 that the BOE’s current mandate is “relatively flexible” and that a nominal GDP target may only be of use as a temporary measure in “unusual circumstances.”

“The inflation target has now become a risk to the credibility of the MPC and is long past its sell-by date,” said Peter Spencer, chief economic adviser to the Item Club. “We are hopeful that the Treasury will see the arrival of a new governor of the Bank of England as an opportunity to review the remit.”

In the report, the Item Club also said the U.K. government should increase borrowing to boost spending on infrastructure and housing to fuel the economic recovery. It sees the economy growing 0.9 percent this year and 1.9 percent in 2014.

“The U.K. has crawled out of recession, but the government’s mid-term report card should read ‘could do better,’” Spencer said. “There is scope for borrowing to help fund infrastructure investment” and “the government could certainly do more to encourage housing investment, which is subtracting from GDP when it should be adding to it.”

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