Why the Bank of England Should Target Growth
Targeting price stability alone may have worked when inflation was a more reliable proxy of the business cycle. Now that it isn’t, Britain's central bank – and perhaps others – should consider a change in mandate to target growth as well.
OXFORD – The Bank of England raised interest rates to 0.75% this month, in the belief that inflation will exceed its mandated 2% target in about two years. But raising interest rates tends to dampen economic activity, and growth is hardly rampaging in the United Kingdom. Should the BoE consider a change to its mandate to include economic growth?
In the United States, the Federal Reserve has a dual mandate: price stability and maximum employment. Of course, the Fed has also raised interest rates this year; but the US economy is growing at over 4% and GDP is expected to be around 3% higher this year.
By contrast, the UK economy grew just 0.2% in the first quarter of this year. While the BoE expects growth to rebound and end up at around 1.5% for the year, it describes this rate as the “speed limit.” Faster growth would fuel inflationary pressures.