Mark Carney, the Canadian central banker who is set to become the Bank of England's governor this summer, said Thursday he is open to a review of Britain's monetary policy framework, potentially opening the way to a more growth-oriented approach in Europe's third-biggest economy.
Addressing lawmakers on the influential Treasury Select Committee for the first time, Carney conceded that "the bar for change" to the current inflation-targeting regime should be high but that it makes sense to review the policies every few years.
Since being granted independence in 1997, the Bank of England has been tasked to set interest rates to achieve a certain level of inflation — at present it has to meet a 2 percent inflation target two years out. But some say the bank should focus on economic growth as well, the way the Federal Reserve does in the U.S.
"The flexible inflation-targeting framework should remain broadly in place, but details need to be reviewed and could be changed," Carney said.
He confirmed he has had a couple of higher-level discussions with British finance chief George Osborne about the "merits of looking at the remit." Osborne has the power to alter, tweak or change the mandate.
In Canada, he said a review is undertaken every five years and helps policymakers, both within government and the central bank, understand the implications and functioning of monetary policy. The main tool of monetary policy is the interest rate and that has huge influences across the economy, from households getting a mortgage to businesses getting a loan.
Carney said there's a debate about the "optimal path of returning inflation to target" especially at a time when both the public and private sectors are in the middle of reining in their debts.
The traditional way of getting above-target inflation back to the mandated level is to raise interest rates. But that could reap huge damage to businesses as well as consumers at a time when the economy is already in the doldrums. Since the financial crisis first reared its head in 2007, inflation in Britain has been mostly above target. Higher interest rates could well have made the economic backdrop even grimmer than it already has been.
Though Britain's current regime does entail an element of flexibility in that it does not require members of the rate-setting Monetary Policy Committee to set interest rates to achieve the target imminently, it is hugely open to interpretation among the nine-member panel. Some critics argue that its remit should change to have a greater focus on economic growth.
In a speech last year where he mulled a new growth-oriented approach, Carney prompted widespread speculation that he advocated the abandonment of a pure inflation-busting approach.
"There seems to be an appetite for debate about the framework and what alternatives there could be and that should be encouraged," Carney said.
Carney is addressing lawmakers Thursday ahead of his arrival at the bank in July. He will replace long-time governor Mervyn King, who has been accused by some for overly-dominating the institution. Carney insisted he would be collegiate.