The Bank has to do more to revive economy

THE Bank of England could start to produce forward looking statements similar to those issued by the US Federal Reserve in order to boost economic confidence, it was revealed in yesterday’s Budget.

Chancellor George Osborne is turning to the Bank of England to do more to help revive the country’s stagnant economy.

In his Budget speech, Mr Osborne said the Central Bank’s inflation target would remain at two per cent a year – but that was not enough. “As we’ve seen over the last five years, low and stable inflation is a necessary but not sufficient condition for prosperity,” he told MPs.

Mr Osborne said he was publishing a review of the Bank’s mandate and said it might need to use “unconventional monetary policy instruments” and give a clearer idea of what it will do in the future. Such instruments in the past have included printing money to buy assets as a way of pumping cash into the economy.

“The new remit explicitly tasks the MPC (Monetary Policy Committee) with setting out clearly the trade-offs it has made in deciding how long it will be before inflation returns to target,” he told MPs.

Such a change might make the Bank operate in a way similar to the US Federal Reserve, which has given signs about how long it will continue to provide support to the US economy. The Bank moves coincide with the arrival in July of a new governor of the Bank, Mark Carney, currently the head of the Bank of Canada.

Mr Carney has previously said he wanted a debate on the role of the Bank.

Mr Osborne said Mr Carney and the Bank’s current governor, Mervyn King both agreed with the new remit which is set by the Chancellor each year.

A further review of the mandate would be carried out before the end of 2019. In his speech, Mr Osborne also confirmed that the Asset Purchase Facility will remain in place for the coming year. He added: “We are now actively considering with the Bank of England whether there are potential extensions to the successful Funding for Lending Scheme (FLS) that will boost lending still further.”

The FLS was launched in August last year to give financial institutions access to cheap money.

Andrew Palmer, CBI director for Yorkshire and The Humber, said: “The impact of improving the transparency and communication of the Bank’s decisions should help amplify the effectiveness of monetary policy and support the recovery.

“More radical monetary policy options, such as forward guidance, could super-charge this further, although it seems that little is likely to change before Mark Carney takes the wheel.”