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The Bank of England’s inflation targeting isn’t working

Published This article is more than 2 years old.

Hear, hear.

The Financial Times’ Martin Wolf thinks it’s high time the United Kingdom rethink its focus on inflation. Unlike the Federal Reserve, the Bank of England has a formal inflation target. But it’s a flexible one. Basically that means as long as the market isn’t flashing major worries about a sharp breakout of inflation over the next few years, the central bank can do other stuff aimed at other economic goals, such as shoring up growth.

On the inflation front, the flexible targeting has been a success. Outgoing Bank of England chief Mervyn King pointed out in a speech last year:

The results in terms of low and stable inflation have been impressive. There have been pronounced reductions in the mean, variance and persistence of inflation in Britain and elsewhere. During the past twenty years, annual consumer price inflation in this country has averaged 2.1%, remarkably close to the 2% target and well below the averages of over 12% a year in the 1970s and nearly 6% a year in the 1980s.

But in the aftermath of the financial crisis, when growth problems have far outweighed inflation worries, inflation targeting—which the BoE put into effect in 1992—might not be the right way to go. Check out British economic growth over the last few years. The UK appears to be on the brink of a triple-dip recession:

In the FT, Wolf writes:

What should be done today, while the economy is trapped in a post-bubble slump? In written evidence, Simon Wren-Lewis of Oxford university argues that there is now “a clear conflict” between what a sensible UK monetary policy would be doing and what is actually happening. “Inflation targeting in the UK is not working, and something needs to change,” he writes. I agree.

The incoming governor of the Bank of England, the Bank of Canada’s Mark Carney, seems to agree. And that could raise the prospects that the Bank of England could make a bigger effort, and join the money-printing party that is currently prevailing in developed markets.

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