U.K. Urged to Scrap BOE Inflation Target in Favor of Growth

(Bloomberg) -- The Bank of England’s inflation target should be abandoned and replaced with a goal for growth, according to a think tank, adding to the debate about how to best manage the economy in the wake of the devastation caused by the coronavirus.

As well as endorsing a system known as nominal GDP targeting, the Policy Exchange also called for temporary cuts to value-added tax and property levies. And it said the U.K. should tolerate higher levels of borrowing to fund spending on infrastructure.

The report was co-authored by Gerard Lyons, a former economic adviser to Prime Minster Boris Johnson during his days as Mayor of London and a contender to replace Mark Carney as BOE governor earlier this year.

The crisis has spurred a debate on what central banks can and should be doing, with some prominent economists and former policy makers arguing for overt, if temporary, monetary financing to soak up public debt. The think tank’s calls for changes to the BOE’s remit echo those made recently by former Goldman Sachs chief economist and Treasury official Jim O’Neill.

Some of the world’s major central banks were examining their inflation targets even before the pandemic after years of ultra-loose policy and trillions of dollars in stimulus failed to revive consumer prices. The virus, as well as the plunge in oil prices, have sparked concerns that deflation is the main threat to economies, rather than prices rising too quickly.

The paper argues that the BOE’s 2% inflation target should be replaced with a goal of increasing nominal gross domestic product by 4% a year. That’s “to help protect against higher inflation in an upturn, and guard against weaker demand in a downturn,” and should be accompanied with yield-curve control measures to keep 10-year rates close to zero.

That monetary stability should help lay the backdrop for increased fiscal activism from the U.K. government, the paper said, with officials taking advantage of lower yields to invest.

The extra borrowing should only be paid down gradually, the report said, since the idea of a new round of austerity is unpopular. The paper said around 50% of the public fear higher taxes as a result of the crisis, and recommended levies should initially go down, rather than up.

“There is ample scope in the current economic climate of low inflation, rates and yields for the U.K. to implement a sizable counter-cyclical monetary and fiscal policy,” the report said. “High debt levels are financeable in this context, and austerity is not needed.”

The U.K. Treasury is in charge of setting the BOE’s mandate.

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