THE Bank of England must be careful not to cause people to doubt its commitment to its inflation target, as it uses the flexibility in its new mandate to help growth, a top policymaker said yesterday.
Martin Weale, a member of the central Bank’s nine-strong Monetary Policy Committee, said policymakers should not be “inflation nutters” who would risk hurting growth in the pursuit of two per cent inflation.
“The correct thing for policymakers to do would be to accept a modest degree of entrenchment of raised inflation expectations as a price worth paying for a smoother output path,” Mr Weale said in a speech in Birmingham yesterday.
At the same time, people might question the Bank’s determination to bring inflation back to target because it has been stubbornly above two per cent for most of the time since the financial crisis, he said.
Mr Weale added: “It is now many years since we experienced the problems caused by unstable and high inflation and inevitably the lessons from that get blunted with the passage of time.
“But the long-term context is certainly one where, without appropriate monetary policy, those problems could return.
“Failure to damp sufficiently any new shock pushing up on inflation would result in inflation expectations becoming more entrenched.
“That, in my view, limits the scope we have to support demand at the current juncture.”
Chancellor George Osborne revised the mandate of the MPC in April, setting out more clearly the trade-offs he expects policymakers to make between their inflation target and helping Britain’s economy to grow more strongly.