If Bank of England governor-designate Mark Carney was looking to spark debate, then his call for the UK to scrap its inflation target (should meaningful growth continue to elude the UK) has done the job.
The FT’s economics editor Chris Giles and economics correspondent Sarah O’Connor write in today’s paper that Mr Carney’s call has divided economists in this year’s FT poll.
Those in favour of sticking with the status quo — 45 per cent — outnumber those calling for a shift to a new regime — 35 per cent. (And not all of those in favour of a switch back Mr Carney’s calls for central banks to target nominal GDP instead.) But in previous years, support from more than a handful of economists for the scrapping of the inflation target would have been unthinkable.
Interestingly, support for change is stronger than average among those who have had to work with inflation targeting: of the ten former MPC members that took part in the poll, five want to do away with the current regime, with the rest in favour of keeping it. Read more
Sir Mervyn King has in the past been of the sort of central banker that has, at every opportunity, extolled the virtues of inflation targeting.
So comments at yesterday’s Inflation Report press conference, where the governor conceded that the Bank of England’s monetary policy framework has its deficiencies, were something of a surprise. Here’s what he said:
“I do think the experience of the last four to five years has raised some question marks about what inflation targeting can hope to achieve and whether it’s sufficient. I think our feeling now is, on its own, it’s not sufficient, it did not prevent the build up of a large degree of financial instability. And there is I think a debate to be had about whether other instruments are the right way to deal with that, through our Financial Policy Committee, or whether monetary policy should take other considerations into account.”
Could this be the beginning of the end for the Bank of England’s inflation target, at least in its current guise?
It’s far too early to say. Besides, with the governor due to depart mid-way through next year, whether or not the Bank alters its monetary policy framework will largely depend on the views of Sir Mervyn’s successor.
However, his calls for a debate could prove significant. Read more
Many of the world’s most senior central bankers believe monetary policy is close to the limits of what it can responsibly do.
One argument is that if central banks would only commit to higher inflation, then monetary policy would be more effective in boosting demand. Proponents fall into various camps: nominal GDP targeters, those who favour a price-level target, or those who want to raise existing inflation targets. Read more
HSBC’s chief economist is calling for price-level targeting in a bid to avoid Japanese-style stagnation. Stephen King says central bankers have not been unconventional enough, and that with huge private sector debts, “the threat of a debt-deflation trap is on the rise”.
There is a strong case for abandoning inflation targets altogether and replacing them with price-level targets. Central bankers claim this reform would make little difference but, as we argue, at least it would force them to maintain zero rates well into the recovery, avoiding the exit strategy confusion seen in the first half of 2010. In a world of excessively low inflation, it is important to persuade the public that interest rates won’t rise until the spectre of deflation is completely eradicated.
- Stephen King in a research note entitled An unconventional truth
The normal laws of cause and effect, he argues, have been suspended: Read more
Daniel Mminele, Deputy Governor of the South African Reserve Bank, today strongly defended its inflation targeting policy, the day after the Treasury announced a review of the scheme.
As South Africa’s economy has suffered the fallout from the global recession – the economy was hit with a whopping 7.4 per cent annualised decline in the first quarter of 2009, though it has since returned to growth and struggles with unemployment rates well in excess of 20 per cent – critics have called for the central bank’s mandate to be widened to include growth and unemployment. Read more