Future Bank of England boss open to policy review

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Associated Press

Posted on February 7, 2013 at 6:04 AM

Updated Thursday, Feb 7 at 8:32 AM

LONDON (AP) — Mark Carney, the Canadian central banker who will become the Bank of England's governor this summer, said Thursday he is open to a review of Britain's monetary policy framework, potentially paving the way to a more growth-oriented approach in Europe's third-biggest economy.

Carney has in the past suggested that central banks like the Bank of England, whose exclusive mission is to keep inflation stable, should also consider giving more weight to economic growth. That has raised speculation that he might look to push for an overhaul the Bank of England's policies when he takes over in July.

Addressing an influential parliamentary committee, Carney indicated that while "the bar for change" to the current inflation-targeting regime should be high, it makes sense to review the policies every few years.

"The flexible inflation-targeting framework should remain broadly in place, but details need to be reviewed and could be changed," said Carney, who will become the first foreign governor of the Bank of England in its near 320-year history.

The central bank's rate-setting Monetary Policy Committee, which on Thursday kept its main interest rate at the record low of 0.5 percent and decided not to pump more money into the economy, noted in an unscheduled statement that its remit was to keep inflation in a way that does not upset growth.

The MPC was established in 1997 when the Bank of England was granted its independence. The bank has been tasked to set interest rates to make sure inflation is at 2 percent two years out. But inflation has been stubbornly above that for much of the period since the financial crisis erupted in 2007. It is currently at 2.7 percent, despite weak pay growth, due to a rise in university tuition fees and energy bills.

In its statement, the MPC said inflation was likely to remain above target for the next two years but that it should then fall back to around the target thereafter, "as a gradual revival in productivity growth dampens increases in domestic costs and external price pressures fade."

The traditional way of getting above-target inflation back down to target is to raise interest rates. But that could inflict huge damage to businesses as well as consumers at a time when the economy is already in the doldrums. In the final three months of 2012, the British economy contracted by a quarterly rate of 0.3 percent.

Carney confirmed he has had a couple of higher-level discussions with British finance chief George Osborne about the "merits of looking at the remit." Osborne has the power to alter the mandate and has signaled recently that he may be open to a change.

Carney said there's a debate about the "optimal path of returning inflation to target."

While Britain's current monetary policy regime does entail an element of flexibility by giving the MPC two years to get inflation to target, it leaves huge space for debate among the nine-member panel. Some critics argue the bank's remit should change to have a greater focus on economic growth.

In a speech last year, Carney floated the idea of a new approach more focused on growth, prompting widespread speculation that he advocated the abandonment of a pure inflation-busting approach.

"Carney sounded less keen than before on a change in the monetary framework," said Vicky Redwood, chief U.K. economist at Capital Economics. "Nonetheless, he was keen at least to review whether it needs changing, leaving the door open to a shake-up at the Bank of England."

Carney will replace long-time governor Mervyn King, who has been accused by some former members of the Monetary Policy Committee of overly-dominating the institution. Carney insisted he would be collegiate.

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