Add growth to Bank of England’s remit, Treasury told
The Treasury has been urged to change the Bank of England’s remit to include growth after a new paper by the Institute of Economic Affairs (IEA) said a focus on nominal GDP would lead to “more stable” policymaking.
The Bank is mandated to hit an inflation target of two per cent and sets interest rates to counter price pressures.
But a new paper by the free-market think tank IEA demands the Treasury to broaden its focus from inflation to total spending in the economy – which would account for both economic growth and inflation.
In the paper by the economist Damian Pudner, the Bank’s inflation-targeting is criticised as being “not fit for purpose” after poor recoveries from the 2008 financial crisis and Covid-19 pandemic.
“Targeting the growth path of nominal GDP would provide a more stable and predictable macroeconomic environment by focusing on total nominal spending rather than a rigid inflation target,” Pudner writes in the paper.
He also claimed the current framework has led to “economic volatility”, with inflation recently hitting a peak of over 11 per cent in late October.
“This would be a very significant political and psychological step to take,” Pudner told City PM.
“You know, no other central bank in any advanced economy has tried this before. Of course, that’s not a reason not to try it.”
Any change to the Bank’s policy framework would require approval from the Treasury, which sets the remit for the Monetary Policy Committee (MPC).
“This is an opportunity for policymakers at the Bank of England and for Treasury officials and ministers within government to make a leap of faith into a new monetary policy that’s fit for the modern age,” he said.
Pudner cited previous support for the change by former Chancellor Sajid Javid, who wrote in 2020 that a change in the Bank’s remit should be considered.
In the paper titled “After the Virus” for the Centre for Policy Studies, Javid supported a review of the Bank’s monetary policy framework.
The Bank adopted its inflation-targeting policy framework in late 1992 after ‘Black Wednesday’ had radically devalued the pound sterling and forced the UK to withdraw from the European exchange rate mechanism.
It has since faced criticism for how it has responded to various crises and responded to
Former Prime Minister Liz Truss hinted that she would radically overhaul the Bank’s mandate and force it to target growth over inflation.
She later blamed the quick end to her tenure on the Bank’s Governor Andrew Bailey, claiming he had been “fatalistic” after she delivered her mini-budget.
Others have called for more subtle changes.
Sushil Wadwhani, who was once an external member on the MPC, said last year the government should follow the example set in the US and allow the Bank to set its own inflation target.
The economist argued that such a change would lead to a decrease in the government’s borrowing costs.
A Treasury spokesperson re-iterated that the MPC would continue to focus on inflation.
“Based on international best practice and historical experience, an inflation target of 2% is the best approach – one used by the European Central Bank and the Federal Reserve,” the spokesperson said.