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Why Change the Bank of England’s Inflation Target?

Tourists outside the Bank of England in the City of London, UK.

Tourists outside the Bank of England in the City of London, UK.

Photographer: Hollie Adams/Bloomberg
Updated on

The Bank of England’s role has been in flux ever since it was founded in 1694 to fund a war with France. Its main job these days is to keep prices in check, something it has largely achieved since being handed control over interest rates 25 years ago. Lately, however, it’s struggled to deal with the shocks unleashed by the pandemic and Russia’s invasion of Ukraine. BOE policy makers came under further pressure when a new government said it intended to review the bank’s mandate, then unleashed a budget that threatened to ignite more inflation. The tension is clouding the future of an institution long seen as a model for others to follow. 

After the breakdown of the Bretton Woods regime of fixed exchange rates in the early 1970s and the high inflation that followed, many central banks, including the BOE, adopted a principle laid out by Nobel Prize-winning economist Milton Friedman: that the best way to ensure steady economic growth and a robust financial system is to focus on keeping prices stable. They do this via so-called inflation targeting -- explicitly aiming to keep prices going up by a small amount each year. The BOE says this makes it easier for businesses to set the right prices and for people to plan their spending.