HC at Free exchange reports:
THE Bank of England released its quarterly inflation report this morning. It also published the letter from Mark Carney, governor of the bank, to George Osborne, Britain’s chancellor of the exchequer, that was required to explain why inflation—currently 0.5%—had deviated more than a percentage point below the bank’s target of 2%.
According to the report’s forecasts, inflation will turn negative in the coming months as a result of the huge fall in oil prices. However, the letter emphasises the short-term, one-off nature of the oil-price shock, which will fall out of the numbers relatively quickly and so requires no offsetting action. Mr Carney noted that in 68% of the categories which make up the CPI, prices are rising. In any case, the bank thinks it takes 18-24 months for monetary policy to have an impact on the economy; the oil-price fall came on much more quickly. [Interesting to contrast with 2008 when they reacted to the rise in oil prices. Will that be ‘hawkish asymmetry’, or does it reflect some learning in the interim?]
When asked whether the bank was overlooking the oil-price decline because it was unanticipated or because it was external to the economy, Mr Carney said it was the former. Were the bank able to forecast supply shocks in time to offset them, it would have to do so under its inflation-targeting mandate (“If we knew it, and could lean against it, we would“). Mr Carney hinted that in such a situation, it might be worth reconsidering the mandate.
Only “hinted” and “might be worth”? That´s very different from the December 2012 Carney who said, just before leaving the Bank of Canada that:
From our perspective, thresholds exhaust the guidance options available to a central bank operating under flexible inflation targeting.
If yet further stimulus were required, the policy framework itself would likely have to be changed. 19 For example, adopting a nominal GDP (NGDP)-level target could in many respects be more powerful than employing thresholds under flexible inflation targeting. This is because doing so would add “history dependence” to monetary policy. Under NGDP targeting, bygones are not bygones and the central bank is compelled to make up for past misses on the path of nominal GDP
And HC continues (to the ‘logical’ conclusion”):
As has been frequently pointed out in the blogosphere, if the bank targeted nominal GDP (NGDP) rather than inflation, there would be no such problem. Under a such a regime, the bank would concern itself only with nominal spending in the economy, which can rise due to inflation or due to output growth (the supply-side of the economy determines the split between the two). The bank could therefore tolerate supply-side shocks which boosted growth and reduced inflation, as they would have an offsetting effect on NGDP. There would be no need to manipulate domestic output to offset forces from abroad.
The BoE has also taken the ‘floor’ from underneath interest rates. Will it join the ‘below zero’ club? The ECB, Danmarks Nationalbank, the Riksbank and the Swiss National Bank?
Six years ago Mankiw wrote: “It May Be Time for the Fed to Go Negative“:
WITH unemployment rising and the financial system in shambles, it’s hard not to feel negative about the economy right now. The answer to our problems, however, could well be more negativity. But I’m not talking about attitude. I‘m talking about numbers.
Needed urgently: A new monetary policy target! NGDP-LT anyone?