No place for ‘inflation nutters’ as economy battles for growth

Martin Weale welcomed the change in the Bank's mandate
Martin Weale welcomed the change in the Bank's mandate
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Central bank policymakers should not be “inflation nutters” focused on a long-term target at the expense of economic recovery hopes, a top Bank of England official said yesterday.

Martin Weale, a member of the nine-strong monetary policy committee (MPC), also pointed to signs that the UK economy was gaining traction, while inflation pressures had eased from earlier this year.

Speaking at a conference in Birmingham, Weale said the Bank of England must be careful not to cause people to doubt its commitment to its inflation target as it uses the flexibility in its newly-reworded mandate to stimulate growth.

Chancellor George Osborne revised the mandate of the MPC last month, setting out more clearly the trade-offs he expects policymakers to make between their inflation target and helping Britain’s economy to grow. The change in the wording has been seen as paving the way for the bank’s new governor, Canadian Mark Carney, to take a more-aggressive approach to boosting growth. Carney takes over from Sir Mervyn King at the start of July.

Weale said: “A central bank run by ‘inflation nutters’ would focus almost exclusively on keeping inflation close to target, although even it would find it impossible to ensure that deviations from target lasted no more than a few months.

“On any reasonable trade-off between inflation volatility and output volatility, the benefits of not being an inflation nutter far outweigh the costs.”

He told the audience at the conference, which was organised by the British-American Business Council: “No-one can be certain but it is possible that the near-stagnation of the past three years is being replaced by a move to modest growth.”

Weale said expectations in financial markets that the central bank would not raise interest rates until at least the end of 2015 provided a “strong steer on future interest rates”.

Minutes from this month’s MPC meeting – due on Wednesday – are expected to reveal another split vote on re-starting the bank’s quantitative easing.