carney suggests dropping inflation targeting

The incoming Bank of England governor has suggested scrapping inflation targeting when attempting to stimulate an ailing economy.

carney suggests dropping inflation targeting


In a speech to the Chartered Financial Analyst Society in Toronto, Carney said central bankers should keep interest rates low until “precise numerical thresholds” for inflation and unemployment are met.

He also suggested changing “the policy framework itself” if a desperately weak economy needs to be stimulated further.

“To achieve a better path for the economy over time, a central bank may need to commit credibly to maintaining highly accommodative policy even after the economy and, potentially, inflation picks up,” the Telegraph reported Carney as saying.

“To ‘tie its hands’, a central bank could publicly announce precise numerical thresholds for inflation and unemployment that must be met before reducing stimulus.

“If yet further stimulus were required, the policy framework itself would likely have to be changed. For example, adopting a nominal GDP level target could in many respects be more powerful than employing thresholds under flexible inflation targeting.”

Carney made his speech in the context of his current job as governor as the Bank of Canada. However, commentators are likely to view it an indication of the likely direction of his leadership when he takes the helm of the Bank of England in June next year.

Mervyn King, the current Bank of England governor, has taken a public stand against dropping the 2% inflation target or committing to long-term low interest rates as Federal Reserve chairman Ben Bernanke has in the US.



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