“Inflation targeting has proven to be a framework for all seasons, an essential part of a robust foundation for economic prosperity”, said the Bank of England (BOE) Governor Mark Carney while delivering opening remarks at The Future of Inflation Targeting Conference, in London.
The bar for change to inflation targeting regime is very high.
There is a debate at the MPC over the relative merits of near-term stimulus to reinforce the expected recovery in the UK growth and inflation.
Rebound forecast by BOE for this year is not assured.
With the relatively limited space to cut bank rate, if evidence builds that the weakness in activity could persist, risk management considerations would favor a relatively prompt response.
Early indicators, from financial market prices and the limited number of business surveys since the election, suggest that there has been some reduction in Brexit-related and domestic policy uncertainties.
Global economy risks being trapped in a vicious cycle of lower global equilibrium interest rates reducing monetary policy space.
There is sufficient headroom to at least double the August 2016 package of 60 billion pounds of asset purchases, a number that will increase with further Gilt issuance.
BOE has equivalent of 250 basis points of policy space – QE, forward guidance, rate cuts all parts of tools.
Economic growth in UK has slowed below potential.
Raising inflation target works better in theory than practice.
Even if the costs of a higher inflation target might be small in aggregate, the distributional consequences could be considerable.
BOE should resist calls for QE to support policies not related to monetary policy, such as environment.
Persistent weakness could require prompt response.
About BOE Governor Carney:
Mark Carney is Governor of the Bank of England and Chairman of the Monetary Policy Committee, Financial Policy Committee and the Board of the Prudential Regulation Authority. His appointment as Governor was approved by Her Majesty the Queen on 26 November 2012. The Governor joined the Bank on 1 July 2013.
In a delayed reaction to the dovish comments from the BOE Governor Carney, the GBP/USD pair is seen extending its declines to fresh weekly lows of 1.3054.