Think-tank calls for new strategy to fire up the economy

The Government should give the Bank of England and its incoming Governor Mark Carney a radical new mandate to get the UK economy moving again, a respected think-tank will argue today.

The Ernst & Young ITEM Club says Threadneedle Street's existing 2 per cent inflation target is "not fit for purpose" and should be replaced with a "money GDP" target. This would require the Bank's Monetary Policy Committee (MPC) to ensure the economy grows by a certain rate in cash terms each year (in other words without taking into account the impact of rises in the cost of living).

In its winter 2012-13 forecast published today, the ITEM Club argues that the existing inflation targeting regime has broken down. This is because a global commodity price shock in recent years has compelled the MPC to keep monetary policy too tight to boost the ailing domestic economy while at the same time allowing monthly price rises to come in consistently above the 2 per cent target.

It argues that the usual defence of the inflation target – that it is simple for the public to understand – no longer applies. "Recent inflation target overshoots and debates about the way that inflation is measured have undermined the credibility of the inflation target…There would seem to be little reason to continue to target an indicator that is very hard to measure, let alone control" it argues.

Pressure is building for a new mandate for the Bank, as the UK economy continues to stagnate five years after recession hit. Official figures released on Friday are expected to show that the economy contacted again in the final quarter of 2012.

The Canadian Mr Carney floated the idea of a money GDP target, also known as a nominal GDP target, last month for economies that have already seen interest rates pushed close to zero. However, some current and former members of the MPC have given the proposals for a new mandate a mixed reception.

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