George Osborne set to review Bank's remit

Criticism of inflation target leads to pressure to overhaul Threadneedle Street's mandate
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The Independent Online

George Osborne will this week pave the way for the first overhaul of the Bank of England's mandate since the monetary authority was granted operational independence under Labour in 1997.

In Wednesday's Budget, Mr Osborne is expected to tell the House of Commons that the UK's monetary policy framework will be reviewed to see whether it could be made more effective.

The Bank's existing 2 per cent inflation target has been criticised in some quarters for impeding its ability to support the recovery. This is despite the fact that the Monetary Policy Committee has slashed interest rates to a record low of 0.5 per cent and printed £375bn to support demand since the depths of the recession in March 2009.

Officials are believed to be looking at granting the Bank explicit leeway to bring inflation down to the 2 per cent target over an extended period of time if economic growth is weak, while also giving the Bank a supplementary employment target.

The outgoing Bank of England Governor, Sir Mervyn King, said, in a speech in Belfast in January, that the inflation target had "come of age" and should be reviewed. This was echoed by the incoming Governor, Mark Carney, in his Treasury Select Committee confirmation hearing last month. "There should be that debate, a relatively short debate [about the framework], because I don't think prolonged uncertainty about the framework is in anybody's interests, and then either a reconfirmation of the existing framework or a change," he said.

It is understood that Mr Carney wants any changes to the mandate to be enacted before he takes the helm at Threadneedle Street in July.

As Chancellor, Mr Osborne is required to reconfirm the Bank's mandate at least once a year. This is normally a formality and takes place alongside the Budget. But, this time, there have been stirrings in Whitehall suggesting that a change to the remit is in the offing.

The top Treasury civil servant, Nicholas Macpherson, was dispatched to Canada for talks with Mr Carney earlier this month. And Mr Osborne's senior aide, Rupert Harrison, was in the US last month where he is reported to have been taking expert soundings on possible changes to the Bank's remit.

"Inflation expectations have been picking up for a reason and uncertainty over the remit has contributed," said Jens Larsen of RBC Capital Markets.