Outgoing Bank of England Governor Mervyn King on Tuesday night launched a thinly disguised attack on his successor, deriding proposals to ditch the central bank’s inflation target in favor of a growth target as “wishful thinking.”
King warned that policies designed to meet a growth target — a strategy backed by incoming governor Mark Carney was unrealistic and for “dreamers,” signaling a rift with the man due to take over in Threadneedle Street in the summer after being lured by British Chancellor of the Exchequer George Osborne from his post as Canada’s central bank chief.
The warning shot comes as Britain faces the prospect of a triple-dip recession and the possible loss of its “AAA” credit status.
“To drop the objective of low inflation would be to forget a lesson from our postwar history,” King told an audience in Belfast. “In the 1960s, Britain stood out from much of the rest of the industrialized world in trying to target an unrealistic growth rate for the economy as a whole, while pretending that its pursuit was consistent with stable inflation.”
“The painful experience of the 1970s showed that this illusion on the part of policymakers came at a terrible price for working men and women in this country. The battle to bring inflation expectations down was long and hard, and involved persistently high levels of unemployment,” he said.
“Wishful thinking can be indulged if the costs fall on the dreamers; when the costs fall on others, it is unacceptable. So a long-run target of 2 percent inflation should be an essential part of our macroeconomic framework,” he said.
Carney floated the idea in a speech last year that central banks should devise policies to meet a healthy level of growth rather than fixate on inflation.
Carney dropped a strong hint that he would favor more vigorous action if growth remained subdued when he takes over in June.
In a speech that appears to have upset King, Carney said central banks should be prepared to downgrade their inflation targets in the event of sluggish growth and instead set themselves the task of raising national output.
The speech was warmly greeted by many economists who have become frustrated at the lack of action at the Bank of England in the past three years.
However, last night the Treasury appeared to side with the governor.
“The chancellor has made clear [that] there [are] no plans to change the current monetary policy framework and agrees with the governor that keeping inflation under control is of vital importance,” a Treasury spokeswoman said.
King was chief economist at the central bank in the 1990s when it was made independent. He devised the 2 percent inflation target, which he points out has recently been adopted by the US Federal Reserve and the Bank of Japan. He also said the Bank of England could follow the lead set by the Fed and signal to consumers and businesses how long interest rates will stay low.