The bottom line is no longer low inflation

Britain's central bank is set to ditch the 2 per cent target

Is one of the cornerstones of British economic and monetary policy about to be scrapped? It certainly seems as if policymakers are moving in the direction of abandoning the inflation target, the first version of which was brought in by Norman Lamont after Britain's ignominious ejection from the European Exchange Rate mechanism in 1992.

Shortly after his appointment as the new Governor of the Bank of England, Mark Carney, in a speech in Toronto, said central banks needed to be willing to keep borrowing costs low for an extended period. And he added: "If yet further stimulus were required, the policy framework itself would likely have to be changed."

That could include adopting a target for unemployment – as with the US Federal Reserve – or nominal gross domestic product growth (NGPD).

Mr Carney is no fool. He knows this will have been heard loud and clear on this side of the pond. And it was. Just a day later, Chancellor George Osborne told a parliamentary committee he was "glad" Mr Carney had raised the issue.

Yes, the party that brought you monetarism and was happy to let unemployment soar above 3 million during the Thatcher years in pursuit of stable prices, is apparently ready to perform a volte-face.

Such talk is anathema to the Bank of England, and on Tuesday in a speech in Belfast, its outgoing Governor, Sir Mervyn King, made his position quite clear. While he said more stimulus might be required to secure Britain's "gentle recovery", he warned of grave consequences of moving too far in the direction Messrs Carney and Osborne appear to be travelling.

"To drop the objective of low inflation would be to forget a lesson from our post-war history," Sir Mervyn said. "In the 1960s, Britain stood out from much of the rest of the industrialised world in trying to target an unrealistic growth rate for the economy as a whole, while pretending that its pursuit was consistent with stable inflation. The painful experience of the 1970s showed that this illusion on the part of policy-makers came at a terrible price for working men and women in this country."

Some might argue that the target – set at 2 per cent based on the consumer prices index measure of inflation –was effectively abandoned by the Bank some time ago. Inflation has been running at above that level since the end of 2009. But, Sir Mervyn made clear these are still exceptional economic circumstances. When – or if – the economy starts to chug along more normally, he believes the inflation target should be moved back into prime position. And his stance enjoys considerable support among business groups.

Katja Hall, chief policy director at the CBI, said: "Sir Mervyn is right to reiterate the importance of well-anchored inflation expectations in delivering economic stability. Clearly, this is an important issue for the incoming Bank of England Governor and the Chancellor to discuss."

Graeme Leach, chief economist at the Institute of Directors, said: "The key problem is that gross domestic product numbers operate on a big lag, so the potential for policy error is far greater. Inflation targeting isn't a perfect science. It is a very difficult thing to do. My view is you should retain inflation targeting, and pay closer attention to broad money growth in combination. It would be a switch in emphasis. But that is what the Bank of England is doing anyway."

The TUC is more sympathetic to Mr Carney, if not the Chancellor. Nicola Smith, TUC head of economics, said: "There's certainly scope to consider widening the Bank's remit to include a focus on growth or employment, as the Fed is now doing. But there is no monetary magic bullet to fix the economy. The Chancellor's supposed monetary radicalism is matched by his refusal to even consider changing his failing fiscal strategy."

In the City, however, they're more sanguine. Philip Shaw, chief economist at Investec, said: "There is a general question as to whether an inflation target is sufficient in this world or whether it is necessary.

"My own view is that it should be followed in a flexible way, supported by measures to ensure financial and economic stability. UK rates were left too low for too long over much of the Noughties, which allowed the economy to become imbalanced. One has to remember that whilst stable prices are an important prerequisite for a prosperous economy they are not on their own sufficient. There are other things that are just as important to consider, such as the financial sector and the rest of the economy."

Andrew Goodwin, senior economist at Oxford Economics, the consultancy, is more radical still.

He said: "Inflation targets worked well while in place in the early Nineties, but in the run-up to the financial crisis it didn't serve us at all well in terms of the asset-price bubble. In the last five to six years we've had inflation well above target and we'd suggest that, certainly, the Bank's Monetary policy committee [MPC] has been been working with a more flexible interpretation of its remit. It would be useful to formalise that in future."

The Chancellor appears willing to contemplate such a move. And if Mr Carney runs into resistance at the Bank, does it matter? Adam Posen this week became the second former member of the MPC to criticise the regime of Sir Mervyn, complaining that he was able to exercise "unfettered power".

Mr Carney, speaking in Ottawa, was at pains to praise the Bank's "analysis and leadership" as "a very important element in addressing the worst of the (financial) crisis". But if he wants to see radical changes to the way the Bank conducts monetary policy, the chances are he's going to get his way.

Suggested Topics
PROMOTED VIDEO
News
ebooksAn unforgettable anthology of contemporary reportage
Voices
Oscar Pistorius is led out of court in Pretoria. Pistorius received a five-year prison sentence for culpable homicide by judge Thokozile Masipais for the killing of his girlfriend Reeva Steenkamp
voicesThokozile Masipa simply had no choice but to jail the athlete
Arts and Entertainment
Sister Cristina Scuccia sings 'Like a Virgin' in Venice
music

Like Madonna, Sister Cristina Scuccia's video is also set in Venice

Arts and Entertainment
James Blunt's debut album Back to Bedlam shot him to fame in 2004
music

Singer says the track was 'force-fed down people's throats'

News
i100
Life and Style
The Tinder app has around 10 million users worldwide

techThe original free dating app will remain the same, developers say

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Senior Pensions Administrator

£23000 - £26000 Per Annum: Clearwater People Solutions Ltd: Our client is curr...

Corporate Actions Administrator / Operations Administrator

£25 - 30k: Guru Careers: A Corporate Actions Administrator / Operations Admini...

Customer Service Executive / Inbound Customer Service Agent

£18 - 23k + Benefits: Guru Careers: We are seeking a Customer Service Executiv...

ASP.NET Web Developer / .NET Developer

£60 - 65k + Benefits: Guru Careers: We are seeking a ASP.NET Web Developer / ....

Day In a Page

Two super-sized ships have cruised into British waters, but how big can these behemoths get?

Super-sized ships: How big can they get?

Two of the largest vessels in the world cruised into UK waters last week
British doctors on brink of 'cure' for paralysis with spinal cord treatment

British doctors on brink of cure for paralysis

Sufferers can now be offered the possibility of cure thanks to a revolutionary implant of regenerative cells
Let's talk about loss

We need to talk about loss

Secrecy and silence surround stillbirth
Will there be an all-female mission to Mars?

Will there be an all-female mission to Mars?

Women may be better suited to space travel than men are
Oscar Pistorius sentencing: The athlete's wealth and notoriety have provoked a long overdue debate on South African prisons

'They poured water on, then electrified me...'

If Oscar Pistorius is sent to jail, his experience will not be that of other inmates
James Wharton: The former Guard now fighting discrimination against gay soldiers

The former Guard now fighting discrimination against gay soldiers

Life after the Army has brought new battles for the LGBT activist James Wharton
Ebola in the US: Panic over the virus threatens to infect President Obama's midterms

Panic over Ebola threatens to infect the midterms

Just one person has died, yet November's elections may be affected by what Republicans call 'Obama's Katrina', says Rupert Cornwell
Premier League coaches join the RSC to swap the tricks of their trades

Darling, you were fabulous! But offside...

Premier League coaches are joining the RSC to learn acting skills, and in turn they will teach its actors to play football. Nick Clark finds out why
How to dress with authority: Kirsty Wark and Camila Batmanghelidjh discuss the changing role of fashion in women's workwear

How to dress with authority

Kirsty Wark and Camila Batmanghelidjh discuss the changing role of fashion in women's workwear
New book on Joy Division's Ian Curtis sheds new light on the life of the late singer

New book on Ian Curtis sheds fresh light on the life of the late singer

'Joy Division were making art... Ian was for real' says author Jon Savage
Sean Harris: A rare interview with British acting's secret weapon

Sean Harris: A rare interview with British acting's secret weapon

The Bafta-winner talks Hollywood, being branded a psycho, and how Barbra Streisand is his true inspiration
Tim Minchin, interview: The musician, comedian and world's favourite ginger is on scorching form

Tim Minchin interview

For a no-holds-barred comedian who is scathing about woolly thinking and oppressive religiosity, he is surprisingly gentle in person
Boris Johnson's boozing won't win the puritan vote

Boris's boozing won't win the puritan vote

Many of us Brits still disapprove of conspicuous consumption – it's the way we were raised, says DJ Taylor
Ash frontman Tim Wheeler reveals how he came to terms with his father's dementia

Tim Wheeler: Alzheimer's, memories and my dad

Wheeler's dad suffered from Alzheimer's for three years. When he died, there was only one way the Ash frontman knew how to respond: with a heartfelt solo album