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Desperate Osborne tweaks Bank of England's remit
Budget changes to make the Bank of England more focused on economic growth are not as radical as expected.
Chancellor George Osborne will lean on new governor Mark Carney to help stimulate the weak British economy under new plans to adapt the Bank of England’s powers to give Brits ‘more confidence that interest rates will stay lower for longer’.
Osborne used a desperate crisis-fighting Budget to address the ‘shortcomings’ of monetary policy, but stopped as far as changing the Bank’s 2% inflation target which he said ‘will apply at all times’.
Under the new plans the Bank of England, which comes under the leadership of Canadian Mark Carney (pictured) in July, will ape the US Federal Reserve by providing ‘forward guidance’ about its future plans.
The Fed has a commitment to keep current low interest rates ‘at least as long’ as unemployment remains above 6.5%. Marc Ostwald, an economist at Monument Securities, warned that the introduction of forward guidance ‘does not mean that this will improve the BoE's woeful forecasting record of recent years’. He added that the Bank had already effectively started using such measures in its latest quarterly inflation reports.
The Bank of England will also have more time to swap letters explaining the reasons for high inflation, allowing it to do better at ‘considering the trade-offs’ between output and inflation, the chancellor said.
City economists said the plans weren’t as radical as might have been expected for a bank that has already been loosely interpreting its inflation target. More radical action had been expected and the pound rose against the US dollar.
Under the leadership of Mervyn King the Bank of England has exhausted many of its tools, holding interest rates at a record low of 0.5%, pumping £375 billion into the economy for bond purchases and offering incentives for banks to lend.
Despite these efforts, inflation has stayed stubbornly above target yet the economy remains weak: Osborne today outlined drastically reduced forecasts from the government’s independent watchdog, the OBR, showing the UK economy will grow by only 0.6% this year.
Currency analysts were quick to warn that sterling would continue its downward trend as today’s Budget did little to fix the economy. ‘The new BOE remit changes consolidate the current mix of tight fiscal and loose monetary policy, the classic death knell for any currency,’ commented Nick Beecroft of Saxo Capital Markets.
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