Bank could be ordered to axe inflation target

Andrew Bailey could be told to abandon the Bank of England’s 2 per cent inflation target under radical plans to reform its mandate and boost the economy. The Bank’s Governor could be ordered to target economic growth in future, under plans being floated by allies of Liz Truss, the Tory leadership frontrunner. This would be a significant departure from current rules. The proposals are thought to be one of several options being considered, with talks at an early stage.

ANDREW BAILEY would be told to abandon the Bank of England’s 2pc inflation target under a radical plan to reform its mandate and boost the economy.

Mr Bailey, the Bank’s Governor, may be ordered to target nominal GDP in future – the size of the economy in cash terms – instead of seeking to keep inflation at 2pc, under plans being floated by allies of the Tory leadership frontrunner Liz Truss.

This would be a significant departure from current rules. The proposals are thought to be one of several options being considered, with talks at a very early stage. Mr Bailey vowed not to quit as the Bank’s Governor on Friday as Kwasi Kwarteng, the Business Secretary, warned that “something has gone wrong” at Threadneedle Street.

Inflation has surged to its highest level in decades and the Bank is predicting a recession, with price rises now expected to peak at 13pc later this year.

It came as house prices suffered their first fall in 13 months according to Halifax, with a drop of 0.1pc between June and July.

Huw Pill, the Bank’s chief economist, insisted in an interview with Bloomberg that the dip would not turn into the kind of “dramatic downturns we’ve seen in the past”.

Liz Truss has pledged to closely examine the Bank’s mandate if she is elected Prime Minister, as a source accused Mr Bailey of doing “b----r all for a long time” to rein in rising prices.

The Daily Telegraph has been told one possibility is that the Monetary Policy Committee’s (MPC’S) longstanding 2pc inflation target could be scrapped altogether and replaced with a new instruction to monitor nominal GDP instead.

This “Nominal GDP Targeting” system would mean the Bank would adjust interest rates to control the amount of spending in the economy, rather than inflation itself.

Nominal GDP growth effectively takes into account both an expansion in economic output and inflation. Economists have long debated whether it would be a more effective target for central banks seeking to smooth out economic peaks and troughs.

The Bank of England and US Federal Reserve both considered introducing nominal GDP targeting in response to the financial crash but decided to continue focussing on inflation.

The Governor yesterday defended Thursday’s decision to increase interest rates by 0.5 percentage points – the biggest jump in 27 years.

Speaking to the BBC Today programme, he said he “made a commitment” to serve eight years at the helm. He said: “It’s very important to the Bank that there’s stability in terms of the term of the Governor.”

However, Mr Kwarteng said: “I think there is an issue about how the Bank is operating because clearly, if I say to you 2 per cent is your target, and you say to me, ‘Well, actually it’s going to hit 13 per cent’, I would quite rightly say something’s gone wrong.”

Ms Truss was yesterday warned by another Cabinet colleague not to interfere with the Bank’s independence on interest rates.