Chancellor hints at big inflation shake-up

George Osborne today signalled he would consider scrapping the Bank of England's 2 per cent inflation target and replacing it with a more pro-growth mandate.

The Chancellor was asked by the Commons Treasury Committee for his view of the incoming Bank of England Governor, Mark Carney, who suggested this week that a nominal GDP growth objective for central banks might be more effective in stimulating weak economies than traditional inflation targets.

Mr Osborne told the MPs on the committee that it is "good there is a debate" on the subject and added that the discussion was "totally to be expected after everything that has happened to the international economy, and indeed to the British economy over the last four or five years".

The Chancellor stressed that he had "no plans" to ditch the present 2 per cent target for Threadneedle Street and that any decisions about the monetary policy framework would have to be decided by the government.

He added: "You would want to be satisfied, and parliament would want to be satisfied, that you were getting some very significant rewards in return for moving away from that." But Mr Osborne made no attempt to conceal his interest in the idea. Moving away from an inflation target would be a revolutionary and deeply controversial shift in monetary policy.

The Bank of England has had a 2 per cent inflation target since it was granted independence in 1997. The central objective for the Bank's monetary policy committee is to hit the target over a two-year horizon. Some critics have complained that the target has prevented the Bank from injecting sufficient stimulus into the economy since the 2008/09 financial crisis. But others say that the Bank has effectively ignored the target because inflation has persistently been above 2 per cent in recent years.

At a speech in Toronto on Monday Mr Carney said NGDP targeting "could in many respects be more powerful" in helping stimulate an economy than traditional inflation targeting when policy interest rates have already been cut to very low levels. The Bank of England's main rate has been at a record low of 0.5 per cent since March 2009. The UK economy has grown by just 0.6 per cent since Mr Osborne became Chancellor.

Mr Osborne shocked the City of London last month when he named Mr Carney, the head of the Canadian central bank, as the successor to Sir Mervyn King, when the present Governor steps down in June 2013. The wide expectation was that the present Bank deputy governor, Paul Tucker, would be named.