Iain Anderson: The Chancellor reboots monetary policy?
Iain Anderson is co-founder of Cicero Group and is an expert in global political risk and economic public policy issues. He has worked for a range of Conservative policymakers. He writes in a personal capacity. Follow Iain on Twitter.
The debate about whether or not the Bank of England should have a specific mandate for growth has already been set firmly in train by incoming Governor Mark Carney.
It’s been a significant debate in the past few weeks.
Today’s Budget showed George Osborne has been listening to his new Governor – after all, he hand- picked him.
It sounds good to me for two main reasons.
Firstly, in the Budget, the Chancellor said he wants an active monetary policy to play a full role in supporting the economy. That has been a key question for most commentators since interest rates hit rock bottom. And an ‘active’ monetary policy needs to be just that – active.
So the "updated remit" for the MPC has all the makings of a serious move to address monetary failings and inflexibility though the downturn. The Chancellor said: "The new remit explicitly tasks the MPC with setting out clearly the trade-offs it has made in deciding how long it will be before inflation returns to
Now – while this needs to be watched – it does provide Bank of England policymakers with some much
Moreover, changing the timing of the requirement of the Governor to write to the Chancellor – when
inflation veers more than 1 per cent above or below the 2 per cent target – to the day of the MPC meeting itself feels like a move towards more joined-up policymaking. It also allows the Chancellor to be able to comment on that trade off and take a more activist stance.
Secondly, the MPC is also being given powers to provide more guidance – publically – on the future
path of interest rates. This mirrors the powers which the US Federal Reserve already has.
This is a very interesting passage of the Budget speech. "This can help the economy because it gives families planning their futures, and businesses wondering whether to invest, more confidence that interest rates will stay lower for longer," said the Chancellor.
This also sounds good to me. Confidence remains the key ingredient of economic recovery. A much better predictive handle on the future path of monetary policy may help provide just such a trajectory.
Just as Bank of England independence was seen as a masterstroke for Gordon Brown, today’s MPC move by George Osborne may be seen, in future years, to have a profound effect on promoting effective policymaking.