OUTGOING Bank of England governor Sir Mervyn King sent a warning shot across the bows of his successor last night with a robust case for keeping an inflation target as a bedrock of economic policy.
King’s defence of price stability in his final regional speech came after governor-designate Mark Carney had suggested dumping Britain’s 2 per cent inflation target to end the country’s lengthy downturn.
But King asserted that control of inflation was rightly “the central plank of the remit” given to the Bank of England’s monetary policy committee (MPC). He gave warning that policy-makers risked forgetting the “painful” lessons of history if they dropped a clear inflation target from the BoE’s mandate in the pursuit of an economic rebound.
“First, the primary responsibility of any central bank is to ensure stability of the price level in the long run,” the governor said in his speech to the CBI at the Titanic visitor centre, in Belfast.
“To drop the objective of low inflation would be to forget a lesson from our post-war history. In the 1960s, Britain stood out from much of the rest of the industrialised world in trying to target an unrealistic growth rate for the economy as a whole, while pretending that its pursuit was consistent with stable inflation.
“The painful experience of the 1970s showed that this illusion on the part of policy-makers came at a terrible price for working men and women.”
He said that in those decades, during which UK inflation hit 20 per cent at the time of Britain’s IMF humiliating bailout in 1976, “the battle to bring inflation expectations down was long and hard, and involved persistently high levels of unemployment”.
In what will be seen in Whitehall and the business world as a coded sideswipe at Carney, currently the highly regarded governor of the Bank of Canada, King added: “Wishful thinking can be indulged if the costs fall on the dreamers; when the costs fall on others, it is unacceptable. So a long-run target of 2 per cent inflation should be an essential part of our macroeconomic framework.”
Carney’s appointment was widely welcomed when it was announced late last year. The Canadian subsequently suggested he would be more radical in trying to revive the UK economy, which has suffered a double-dip recession during the period since 2008.
He suggested this could include numerical targets for unemployment, and commitments to keeping historically low British interest rates on hold for an extended period of time.
It was seen as a clear break with the views of the BoE’s senior management. However, King said yesterday that it was “interesting to note” in the past 12 months both the US Federal Reserve and the Bank of Japan had adopted a 2 per cent target for mid-term inflation.
The Fed has traditionally had the twin mandates of managing price stability and promoting growth in the US economy.
Ironically, Britain’s inflation has been above target for a long period, rising to over 5 per cent last autumn. However, King said the BoE had not intervened earlier to bring inflation down through higher interest rates as a trade-off to avoid driving up unemployment. One in five of the country’s 16- to 24-year-olds is without a job. “I know of no-one who has argued that the problem with the UK economy is that it has not had a sufficiently deep recession,” he said.