Last month, we had Mark Carney, the Governor of the Bank of England designate discussing the merits of nominal GDP targeting, alongside greater inflation targeting flexibility and forward rate guidance. The text of his Guidance speech to the CFA Society Toronto is an interesting read. Despite his remarks that they did not contain any direct signals about policy in Canada or elsewhere, it’s pretty clear that it will not be more of the same at the Bank of England after he assumes the position on 1 July 2013. At a CBI dinner in Belfast on Tuesday, Mervyn King responded arguing that the Bank of England’s inflation-targeting remit may need to be fine-tuned but should not undergo fundamental change.
The inflation target and monetary policy mandate is set by the Treasury, not by the Bank of England, so the remit is not really theirs to decide. This is set each March on the day of the budget, with any change needing to come from the Chancellor.
It is interesting to trace each man’s own inflation experience. King celebrated his 18th birthday on 30 March 1966. Carney celebrated his 18th birthday on 16 March 1983.
Over their adult life, Carney has seen domestic inflation grow at a rate of 2.6% per annum. By contrast, King has experienced inflation of 6.2% per annum.
Comparison of UK and Canadian Inflation
Source: Bloomberg, as at 31 December 2012.
Now of course, Carney hasn’t lived his whole life in Canada and neither individual is conditioned solely by their domestic experience but it may go some way to explaining a different attitude.
The challenge remains for policy makers to walk the tightrope of stimulating economic growth and keeping inflation in check. The expectation is for inflation to remain above target for 2013 and the challenge is set for Carney as he assumes the role in July.