In a wide ranging debate the incoming Bank of England governor says he is open to changing UK monetary policy, but that he favours flexible inflation targets – and defends his £800,000 pay packet.
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In his first hearing with MPs ahead of taking up the job in July, Mr Carney said he believed that monetary policy should be “reviewed periodically”, saying this was done in Canada every five years. But he insisted that he had not looked at whether it should be altered in the UK and that any decisions in that area would be for the government.
In a charming, statesman-like appearance, Mr Carney also defended his £800,000 pay deal – which includes a £250,000 housing allowance – as being in line with that of Sir Mervyn King‘s on a “pay and pension” basis, and said it made up for moving to London, one of the “most expensive capital cities in the world”.
The Canadian central bank governor also refuted suggestions made in the Financial Times on Thursday morning, that Chancellor Geoge Osborne has been putting pressure on the Bank of England over its growth figures. “No political influence will come to bear – it might be attempted,” he told MPs, adding: “Part of the reason for the independence, is that difficult decisions on the macro financial side will not always be met with shouts of joy.”
The committee hearing came as the Bank of England‘s monetary policy committee kept the UK’s interest rate at 0.5 per cent, and left its quantitative easing programme on hold.
Read more: Can Carney wield his wand to heal the UK’s wounded economy?
Much has been made of the difference between Mr Carney and his predecessor Sir Mervyn King. He tried to play down differences in style between them, adding that Sir Mervyn also had a “consensual” approach.
But committee chairman Andrew Tyrie said that Mr Carney’s repeated references to consensus indicated that “there’s something going on here – this is a change of approach we are meant to notice that you are signalling”.
Mr Carney also suggested that in an era of ultra-low interest rates, there might be some merit in the Bank of England making some kind of commitment to very low rates for a period of time – doing so in Canada had encouraged people to spend. The current governor, Sir Mervyn, has tended to emphasise that interest rates are decided on a month by month basis and has avoided making promises about where rates will go in the future.
“It’s official. The inflation target is now a ‘flexible inflation target’,” writes Economics Editor Faisal Islam. “I don’t think this is just semantics. Monetary policy under Sir Mervyn King since the crisis has been informally flexible. The bank has offered stimulus even when inflation has been repeatedly and persistently above 3 per cent.
“Cutting through Governor Carney’s slick presentation it seems that he is not gunning for a radical change to the mandate for monetary policy…But he clearly wants to do more than is being done right now in Britain’s contracting economy.” Read more on Faisal’s blog
Policymakers at the Bank of England have previously been criticised for failing to bring inflation back down to 2 per cent since the financial crisis, although Sir Mervyn recently warned that scrapping the target altogether could have “irresponsible” consequences. Mr Carney said he believed flexible inflation targeting – where inflation is allowed to stray from the target, as it is currently in the UK – was likely to be the “best” policy.
Mr Carney said he would welcome a debate over whether the Bank’s Monetary Policy Committee should continue to set interest rates against the target of maintaining 2 per cent inflation in the UK economy.
But he said that he believed the debate would show that the inflation target remains a “superior alternative” to other goals, and stressed that any change in the MPC’s remit would be for Mr Osborne to decide, and not him.