BoE ‘must tread carefully’ with inflation approach

The Bank of England must be careful not to cause people to doubt its commitment to its inflation target as it uses the flexibility in its newly reworded mandate to help growth, a top policymaker said today.

Martin Weale, a member of the central bank's nine-strong Monetary Policy Committee, said policymakers should not be "inflation nutters" who would risk hurting growth in the pursuit of 2 per cent inflation.

“The correct thing for policymakers to do would be to accept a modest degree of entrenchment of raised inflation expectations as a price worth paying for a smoother output path,” Mr Weale said in a speech.

At the same time, people might question the bank’s determination to bring inflation back to target because it has been stubbornly above 2 per cent for most of the time since the financial crisis, he said.

“It is now many years since we experienced the problems caused by unstable and high inflation and inevitably the lessons from that get blunted with the passage of time,” he said.

“But the long-term context is certainly one where, without appropriate monetary policy, those problems could return.”

“Failure to damp sufficiently any new shock pushing up on inflation would result in inflation expectations becoming more entrenched. That, in my view, limits the scope we have to support demand at the current juncture,” Mr Weale said.

British finance minister George Osborne revised the mandate of the MPC in April, setting out more clearly the trade-offs he expects policymakers to make between their inflation target and helping Britain’s economy to grow more strongly.

The change in the wording has been seen as paving the way for the bank’s next governor, Canadian Mark Carney who takes over in July, to take a more aggressive approach to getting growth going again.

Mr Weale said he saw signs that the British economy was recovering its footing while inflation pressures had eased from earlier this year.

“No one can be certain but it is possible that the near-stagnation of the past three years is being replaced by a move to modest growth,” he told a conference organised by the British-American Business Council in Birmingham.

Mr Weale said expectations in financial markets that the Bank of England would raise interest rates only in 2016 provided a “strong steer on future interest rates.”

Reuters