Bank of England's King says time to review inflation targeting

Tue Jan 22, 2013 2:45pm EST
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By Padraic Halpin and David Milliken

BELFAST Jan 22 (Reuters) - The Bank of England's inflation-targeting remit needs to be fine-tuned but should not undergo fundamental change, central bank governor Mervyn King said in a wide-ranging speech on Tuesday.

King also said the central bank was ready to restart bond purchases or cut interest rates if needed to boost the economy, but that Britain needed more fundamental reforms if it was to exceed the "gentle recovery" which he expects for 2013.

King steps down in June, and his successor Mark Carney, who currently heads the Bank of Canada, has promoted long-term commitments to low rates - which are also in favour at the U.S. Federal Reserve - as well as discussing the merits of targeting the size of the economy in cash terms instead of inflation.

To date the Bank of England has been unenthusiastic about explicit interest rate commitments - arguing its existing policy framework is clearer than other central banks'.

And finance minister George Osborne, who ultimately decides the bank's goals, said last month that while he welcomed debate, there would need to be a strong case for change.

However, in what is likely to be his last speech outside London, King told members of Belfast's business community that it was time for the BoE and the government to think again.

"Recent actions by central banks and governments in a number of industrialised countries have raised questions about the frameworks within which monetary policy is being conducted," he said.

"In the UK, the inflation target was introduced almost 21 years ago, and it has now come of age. It would be sensible to review the arrangements for setting monetary policy," he continued at the Confederation of British Industry event.   Continued...