By Dow Jones Business News, March 20, 2013, 10:05:00 AM EDT
LONDON--U.K. Chancellor of the Exchequer George Osborne Wednesday announced changes to the Bank of England's
inflation-fighting mandate, a move aimed at paving the way for incoming governor Mark Carney to deploy more of the
central bank's formidable firepower to lift the U.K.'s economy out of stagnation.
The changes, which will arm the rate-setting Monetary Policy Committee with new tools used by other central banks,
including the Federal Reserve and the Bank of Canada, underscore a lively debate in advanced economies over how best to
use monetary policy to help restore economic growth after a decadelong financial boom turned to bust in 2008.
But economists said the new remit, which fell short of some analysts' expectations for a wholesale overhaul of
Britain's monetary-policy regime, may not deliver the step-change in the BOE's efforts at driving recovery that the
In his annual budget statement to lawmakers in Parliament, Mr. Osborne reaffirmed the U.K.'s commitment to low and
stable inflation, saying the government remains wedded to price stability as "an essential prerequisite" for economic
The BOE is tasked with keeping annual inflation at 2% but over the past five years it has tolerated frequent
overshoots of the target to avoid pushing up borrowing costs and strangling the economy.
The new remit permits the BOE to allow inflation to stray from its 2% target if the economy is in trouble, provided
the MPC clearly sets out the arguments for doing so and how quickly it intends to get inflation back to target.
More significantly, the new mandate gives the MPC the power to deploy whatever tools and policies it sees fit to meet
its inflation objective, including policies aimed at easing the flow of credit to the private sector, and making use of
Fed-style guidance on the future path of interest rates and the size and pace of its efforts to stimulate growth through
The Fed last year vowed not to touch short-term rates and to keep printing money to buy securities until the U.S.
unemployment rate falls to 6.5%, provided inflation doesn't take off. It is a strategy Mr. Osborne said he wants the BOE
"This can help the economy because it gives families planning their futures, and businesses wondering whether to
invest, more confidence that interest rates will stay lower for longer," Mr. Osborne told lawmakers. He didn't specify
whether the BOE will link its policy guidance to unemployment like the Fed or to some other economic variable. The BOE
will publish an assessment of the options in August, he said.
The chancellor's move is aimed at encouraging the BOE to spark faster economic growth by expanding stimulus while his
government presses ahead with a multiyear plan to rein in the U.K.'s yawning budget deficit.
Mr. Carney, the Bank of Canada chief who takes over from Mervyn King at the BOE's helm in July, signaled in February
his support for the kind of policies the BOE's new remit permits. Mr. King said in a response to the chancellor
published by the central bank on Wednesday that he and Mr. Carney have discussed the proposed changes to the central
bank's mandate and support them.
Economists said that despite feverish speculation over possible mandate changes in the run-up to the budget, the
tweaks that have been announced are unlikely to radically alter the direction of BOE policy. Sterling rose against other
currencies Wednesday amid relief that the mandate won't change as much as some in the market had feared.
The central bank has held its benchmark interest rate at 0.5% for four years and since 2009 has bought 375 billion
pounds ($566 billion) of U.K. government bonds through its program of bond purchases known as quantitative easing.
Minutes of its March policy meeting, published earlier Wednesday, showed three of the nine-person rate-setting panel are
clamoring for more, despite expectations that annual inflation will top 3% this year and stay above target until 2016.
"The remit emphasizes the flexibility of the target by pointing out the need to ensure price stability in the medium
term. But in practice this means little. After all, the bank has been looking through sticky inflation," said George
Buckley, an economist at Deutsche Bank.
Chris Williamson, chief economist at Markit, said the changes are sensible, but added that he doubts whether more
stimulus, even if a new mandate made it forthcoming, would result in faster economic growth in the U.K.'s battered
"It's a sign of the times. Central banks have to change," Mr. Williams said, a nod to the shortcomings of inflation-
targeting regimes in averting the financial crisis of the past few years.
"But I fail to see how more and more QE on its own will be sufficient to stimulate the economy as much as it needs,"
Write to Jason Douglas at email@example.com
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