Osborne Paves Way for Carney to Retool Bank of England
British finance minister George Osborne has laid the groundwork for a partial revamp at the Bank of England when new Governor Mark Carney arrives in July, but more radical options remain off-limits.
Trying to keep consumer price inflation at 2 percent will continue to be the central bank's main job, even after the biggest change to its monetary policy remit since it gained operational independence in 1997.
The new mandate Osborne announced on Wednesday is in many ways a tidying-up exercise, giving formal backing to the central bank's current practice of letting inflation overshoot its target if the alternative would be an economic slump.
Carney may also be able to import new tactics such as making long-term commitments to low interest rates which he has championed at the Bank of Canada and have found favor at the U.S. Federal Reserve.
Britain's economy has been stagnant for the past two years, in the face of Bank of England bond buying and schemes to boost lending, fueling speculation Osborne could order major change.
But despite his mantra of "monetary activism with fiscal responsibility", Osborne did not ask the central bank to target growth as well as inflation, stressing "the primacy of price stability and the inflation target".
The head of Britain's debt agency - who will be responsible for selling around 151 billion pounds of government bonds in the coming year to fund the country's budget deficit - told Reuters the news would reassure investors.
Some in financial markets had speculated Osborne could ask the BoE to adopt a Fed-style dual growth and inflation mandate, or to target a new measure of inflation which includes housing costs and has been persistently lower than the existing measure.
The pound rose in value against the dollar on Wednesday after the remit announcement as investors took it to represent a smaller move than some had feared.
"The new remit is more a clarification than a change in mandate," said Investec economist Philip Shaw. "The changes are sensible, and therefore welcome ... but at this stage it is difficult to conclude that they represent a shift to 'monetary activism' as the chancellor claims."
Ed Balls, finance spokesman for the opposition Labour party, quipped that it was Osborne who needed to change his remit, not the BoE, and a senior Treasury official acknowledged that the new remit amounted to "evolution rather than revolution".
The British central bank has been innovative since 2009, when it launched a program of asset purchases with newly created money - also known as quantitative easing - which has sucked up 375 billion pounds of government debt to date.
The biggest change in the new remit is a request for the central bank to publish a report in August into the merits of using so-called "state-contingent intermediate thresholds".
Translated into plain English, this could mean committing to buy more government bonds until unemployment falls below a certain level or inflation rises well above its target.
The Fed and the Bank of Canada have done this sort of thing since the financial crisis. But the BoE has avoided it because of doubts over whether it was consistent with its remit, and a strong reluctance from long-serving Governor Mervyn King and other officials to pre-commit to policy moves.
The Bank of England may find it easier to make this change when Carney arrives, said Rob Wood, a former BoE economist who now works for Berenberg Bank, possibly easing the launch of more bond-buying.
"The chancellor has crossed his fingers and is waiting for the cavalry, in the shape of Mark Carney, to come and save the day," he said.
"Forward guidance is Carney's calling card. As practiced by the Fed, an example Osborne specifically referred to, guidance comes hand in hand with further asset purchases, so we continue to expect ... more asset purchases after Carney takes over."
However he will still have to get the other eight members of the Monetary Policy Committee (MPC) on board, which may prove tougher than in Canada.
Not only are MPC members encouraged to make their disagreements about the right course for policy public - unlike in Canada - but some have said they see little reason for markets to believe long-term policy commitments that are intended to outlast the policymakers themselves.
Shortly before the new remit was published on Wednesday minutes of the BoE's last policy meeting showed officials split over further asset purchases. Some worried they could further weaken sterling, which has already lost around 7 percent against the dollar this year, and push up inflation.
Other changes to the remit are more minor, and are likely to find greater consensus on the MPC.
The new remit makes clearer that inflation may sometimes exceed its target, but also places a greater onus on the MPC to explain what trade-offs it is making when it allows inflation to do so.
The MPC must also take account of the BoE's new financial supervision powers which come into force in April.
Although another bank committee has most of the tools to control financial bubbles, the MPC is also now allowed to take action such as raising interest rates to pop an asset bubble if other tools fail.