This article was last updated on April 16, 2022
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Mark Carney, all set up to join the Bank of England as a governor next year, suggested in a recent speech that the bank shall be targeting economic output rather than inflation. At the moment, the Bank’s job is to aim for an inflation target of 2%. Mr Carney explained during his speech that targeting gross domestic product (GDP) which is not yet accustomed for inflation means that economy will have to catch up with previous shortfalls as well. He pointed out that it might have been suitable in case our interest rates were near zero.
Mr Carney, currently residing as governor of the Bank of Canada, alleged that one of the problem while changing the target will be that “people must generally understand what the central bank is doing – an admittedly high bar”. It has now become a trend since decade long practices of setting economic targets to inflation, but now Carney suggested that a central bank shall clearly implies how high inflation or unemployment shall be addressed before increasing interest rates.
A senior currency strategist from Rabobank, Jane Foley, commented on Mr Carney’s remarks, saying that “on paper, this approach appears to be far more aggressive than the BoE’s current objective.” She added “however, in practice, the extreme economic climate of recent years has meant that BoE has not been conducting policy strictly in accordance with its 2% policy.” Furthermore she pointed out that it paid “greater heed to the performance of the real economy” in recent times.
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