Carney Will Allow Inflation Overshoot as Growth PrioritizedBy and
BOE governor has previously said more stimulus may be needed
Officials are not indifferent to pound level, Carney says
Mark Carney said he’ll tolerate an overshoot of the Bank of England’s inflation target, suggesting that supporting economic growth remains the priority after the Brexit vote.
The comments come amid a sharp drop in the pound that’s pushed up import costs and sent inflation expectations to the highest since early 2014. While Carney and a majority of BOE policy makers have said they’ll support another rate reduction this year, forecasts for a rapid acceleration in inflation could stay their hand.
Even with early signs of price rises, Carney didn’t rule out the potential for more stimulus. He said the outlook for unemployment means that measures so far -- the BOE cut its benchmark in August and restarted quantitative easing -- are justified.
“Our judgment in the summer was that we could have seen another 400,000-500,000 people unemployed over the course of the next few years,” he said at an event on Friday in Nottingham, England. “So we’re willing to tolerate a bit of overshoot in inflation over the course of the next few years in order to avoid that situation, to cushion the blow.”
Carney also said that while the BOE doesn’t target the exchange rate, its level matters for inflation and how policy makers assess the economy.
“Our job is not to target the exchange rate, our job is to target inflation,” he said. “That doesn’t mean we’re indifferent to the level of sterling. It does matter ultimately to where inflation is and over the course of two or three years out, it matters to the conduct of monetary policy.”
With the currency down almost 2 percent this week, and 18 percent weaker since the June 23 vote to quit the European Union, that will play into the BOE’s new forecasts, which it will publish alongside its policy decision on Nov. 3. Deputy Governor Jon Cunliffe said this week the projections will be “very important” and take into account the latest swings.
U.K. inflation was just 0.6 percent in August, well below the BOE’s 2 percent goal. But the central bank’s last projections saw it rising above that level next year. Economists at JPMorgan Chase & Co. see it reaching 2.6 percent by the second quarter of 2017.
Monetary Policy Committee member Kristin Forbes, speaking at a separate event in Warsaw, said the U.K. might overshoot its inflation target “sharply” in the next two years. She voted against some of the BOE’s August stimulus measures, and said on Friday that she was concerned the pound could depreciate further from “too aggressive an easing.”
Carney was speaking to charities and business groups, part of a tour of the Midlands by the bank’s most senior officials as they try to boost public trust in the institution. The visits come a week after Prime Minister Theresa May added her voice to the criticism of loose monetary policy by saying it has had “bad side effects.”
Asked about the dividing line between politics and the BOE, Carney said government defines the bank’s remits, but he and his colleagues act independently.
“Politicians have done a very good of setting up the system. Where it can be difficult some time is if there are political comments on our policies as opposed to political comments on our objectives,” he said. “The objectives are what are set by the politicians, the policies are done by technocrats. But we’re not going to take instruction on our policies from the political side.”
Carney acknowledged that the U.K.’s recovery since the recession after the financial crisis hasn’t benefited everyone.
“The fruits of the U.K. recovery have not been evenly shared,” he said, citing London and the South East as regions that have seen the most benefit.