MPC needs to send clearer signal about its commitment to supporting the recovery – ITEM Club

  • Share

Nida Ali, economic advisor to the EY ITEM Club, comments on today’s interest rate decision:

  • Initial signs of improvement in the economic outlook had always meant that the MPC were likely to sit tight on monetary policy this month
  • Although recent policy initiatives are a step in the right direction, the Bank needs to send a clearer signal about their commitment to supporting the recovery
  • In our view, the inflation target is very outdated and the time is right to start targeting nominal GDP instead

“With some signs of an improvement in the economic outlook, particularly the relatively encouraging PMI surveys for January, it was always likely that the MPC would sit tight on monetary policy this month. Committee members still appear to be in wait-and-see mode to judge how their policy initiatives, such as the Funding for Lending Scheme (FLS) are feeding into the real economy.
 
“While we believe that the FLS is a step in the right direction, and is starting to show some positive impact on the economy, we still think that the MPC needs to send a clearer signal about their commitment to doing whatever it takes to keep the recovery on track. The view that monetary policy is a key tool to stimulate growth in the UK has been endorsed by the OECD as well as Chancellor George Osborne.
 
“Since Mark Carney’s speech in mid-December, where he questioned the idea of inflation targeting in the context of prolonged economic weakness, the UK’s inflation target has come under scrutiny. We agree with Mr Carney’s view that the current structure of UK monetary policy should be debated by considering alternate options, such as adopting numerical thresholds for inflation and unemployment, which must be met before reducing stimulus.
 
“In fact, we believe that the idea of targeting inflation is very outdated, and adopting a nominal GDP target instead would be more relevant in the current circumstances. In addition to being easier to measure than inflation, a nominal GDP target would provide MPC members with more flexibility to use unconventional tools to ease monetary policy, without losing their credibility in the process.”