George defends Bank's policy

Eddie George, Governor of the Bank of England, defended the Bank yesterday against the charge that it is ``congenitally pessimistic'', writes Diane Coyle. The Bank had to err slightly on the side of caution, he said, ``in order to build up policy credibility against the background of the UK's unhappy track record''.

It had also been less over-pessimistic about inflation than many other forecasters, he said in a speech to the Swedish Economics Association. Critics were wrong to conclude that the Bank wanted to bias the economy towards deflation.

Mr George added that the Bank's concern with the control of inflation was, ``as a means to the end of sustained growth in activity and employment.''

The current state of demand did enter the Bank's calculations through its inflation forecast, but this was an uncertain process.

The Governor conceded that the fact that most people think forecasts are either right or wrong meant setting interest rates according to forecasts of the economy two years hence could ``weaken the operational credibility of policy''. The Bank could not afford to consistently overdo its caution.

Despite these difficulties, the inflation target was better than the alternative. Shadowing and then joining the Exchange Rate Mechanism had been a ``disaster'' in his view.