'Carney rejects King'

Gavyn Davies gives an update on where monetary policy in the UK is likely headed when Mark Carney takes over as governor of the Bank of England:

Carney rejects King and supports the Fed doves, by Gavyn Davies: Mark Carney ‘s comments on monetary policy at Davos, though not specifically about the UK, opened a wide gap between his thinking and that of outgoing Governor Sir Mervyn King (see this earlier blog). The latter expressed doubts last week about the ability of monetary policy to boost the economy further, given his concerns about the UK supply-side, and his related worries about the 2% inflation target.

At Davos, Mark Carney showed very little sympathy for any of this, arguing that there is plenty of scope for monetary policy to boost the developed economies further... Mr Carney said that it might be acceptable for inflation to exceed the government’s 2% target for a fairly lengthy period, especially in the context of fiscal consolidation. ... But it is not clear how this approach can be made compatible with the Bank of England’s current mandate, which has always been interpreted by the MPC as requiring a return to a 2% inflation target over roughly a two year horizon. ...

Mr Carney seems to think that he can just about square his remarks yesterday with this “flexible inflation target” mandate, but in spirit his remarks are more in keeping with a nominal GDP target, or a twin inflation/employment mandate of the Fed variety. If policy is to shift in this direction, which means placing a greater weight on unemployment within a Taylor rule framework, then many members of the MPC might prefer the government to reduce confusion by changing the official mandate. ...

Without a change in the mandate, there is some doubt about whether the majority of the current MPC would support Mark Carney’s approach. ...