The Bank of England, the chancellor, and the target

Bank of England

Does the chancellor want to set a new target for the Bank of England? The answer is no.

But does he want have a debate about it? The answer is an emphatic yes - for political reasons as well as economic ones.

With the UK economy starting the the new year no larger than it was 12 months ago, it makes perfect sense, from an economic standpoint, to consider whether there is more the central bank can do to help.

Unreliable numbers

At last week's meeting in Davos, many policymakers and economists from around the world were debating the same thing - particularly Japan and the US.

The arrival of a new governor at Threadneedle Street provides a perfect opportunity for such a debate to happen, without anyone getting too defensive (not that anyone would dare call Sir Mervyn King defensive).

But clearly, for the chancellor, the debate also has an added political benefit: the more the focus is on what the Bank of England can or should do to revive the economy, the less that harsh spotlight may fall upon him.

The Financial Times reports that the Treasury has cooled on the idea of formally replacing the inflation target with a target for nominal - or cash - GDP. In fact, I don't think Number 11 was ever very hot on the idea.

There are just too many practical obstacles standing in the way, including those flagged up by soon-to-be Governor Mark Carney.

I mentioned the big ones in my previous post on this. Right now, for example, there is no monthly measure of cash GDP. You would need to create one for the central bank to feel comfortable targeting it.

Much more important, the Bank would need to have some confidence that those numbers were not going to be constantly - and extensively - revised. Neither seems very likely.

As one respected central bank governor said to me in Davos: "If I ever thought I could have anything close to the same level of confidence in nominal GDP numbers that I have in the Consumer Prices Index, I would be happy to target cash GDP. But I just don't see that happening."

'No bygones'

But there is another big objection to the pure form of nominal GDP targeting, as described by Mr Carney in his December speech - which is that it does not let bygones be bygones.

For supporters, it's a plus. For politicians and practical-minded officials, it's a potential minefield.

If you've targeted a particular growth rate of cash GDP and the economy has not reached that rate, over a sustained period, the point of cash GDP targets is that the central bank is not supposed to just forget about those failures and look to the future - as the Bank of England has done with the inflation target.

It's supposed to try to get back to the path that was originally mapped out.

Supporters like this aspect because they say it would force the Bank of England to do more, right now, to make up the economic ground lost since 2007, even if inflation overshoots.

In practice, even that's not guaranteed: if you take 2005 as the last time that the UK was "on trend" (or operating at exactly its capacity), the growth in our nominal GDP between then and 2012 looks about right. If you start the clock in 2007 - as I did in my earlier post on this - it looks far too low.

Precisely because the "no bygones" approach is so sensitive to the starting year, the Chancellor's advisors don't think it would ever fly politically.

Even if voters understood what nominal GDP was - as they currently don't - will they really ever believe that a government is going to withstand years of well above, or well below, target inflation, simply to get back to a particular, fairly arbitrary path for the cash value of the economy that was laid down by the folk who were in power before them?

The general view in Number 11 is that the answer to that question is no.

Politicians are always going to let bygones be bygones - for the very good reason that voters expect them to think and talk about the future, not the past.

If that's right, then one of the big supposed benefits of nominal GDP targeting - that consumers and businesses will have some certainty about the future path of their nominal incomes - largely evaporates.

Could you have a target for the growth of cash GDP that did not have this feature? Perhaps. But even if you weren't thinking about where you were, with regard to the past level of cash GDP, you would still have to worry about whether the numbers themselves were right.

Bending over backwards

If all this has messed with your brain, you're not the only ones.

All in all, the conclusion many in Whitehall and the city are drawing is that the debate about nominal GDP targeting is more trouble than it's worth.

There's a reason, it turns out, why the monetary policy target most loved, in theory, by academic economists for the best part of 40 years has never made it to the point of actually being used.

But - as I said at the start, Number 11 really does want a debate about all this. And not just because everyone else around the world is debating it.

As Governor Carney reminded his audience in Davos, the Bank of England and many others have a system of "operational independence". That means the government sets the target, and the central bank is free to work out how to meet it.

Recently, the Bank of England has introduced a lot of flexibility to its mandate, in order to avoid tanking an already anaemic recovery with drastic efforts to get inflation back to 2%. Some of that flexibility was already built into the original framework. But it has been stretched pretty far.

If the UK's central bank is going to bend over even further backwards to support the recovery - for example, linking policy to some future state of the economy, as the Federal Reserve has done, or using other forms of communication to lock in policy in advance - then at least some people inside the Bank and the Treasury think the Bank needs a formal mandate to do it.

That is why the Treasury is not ruling out some changes to the monetary policy framework this year, even as it pours a bit of cold water on the nominal GDP debate.

Where everyone seems to agree is that changing the Bank of England's approach - either on paper or in practice - will be a helluva lot easier when there's been a change of leadership at the top.

Stephanie Flanders, Economics editor Article written by Stephanie Flanders Stephanie Flanders Former economics editor

So it's goodbye from me

After 11 years at the BBC, I'm leaving for a new role in the City.

Read full article


This entry is now closed for comments

Jump to comments pagination
  • rate this

    Comment number 231.

    Some interesting comments about calculations of GDP but more action by the BOE on relation to stimulating investments in the UK in the direction of UK manufactiring halting the investments made by UK companies manufacturing in China . This would inturn increase GDP & employment. Show the way to Europe. Get our peoples money home please, Positive BOE comments positive investments, Bank reforms ?

  • rate this

    Comment number 230.

    229/8 "descend to insults"

    Oh yes we do from time to time. Isn't passion important? I detest certain attitudes, for example I am entirely intolerant of intolerance!

    Of course the BBC have chosen a format to magnify the biliousness of our discourse. The 400 character limited is DESIGNED to raise contributors' blood pressure & the BBC will be responsible for the resulting rise in extremism!

  • rate this

    Comment number 229.

    Alan, as you said in your prevous post, the target under discussion does not seem a very sensible one. No doubt the other posters agree with you and are trying to suggest better ways of managing the economy. At least the contributor's to Stephanie's blog are reasonably well intentioned and polite; they don't descend to the insults you'll find in Gavin Hewitt's Euro blog.

    PS Melanie == Stephanie?

  • rate this

    Comment number 228.

    It's virtually impossible to find one post - my previous post is an exception - which addresses the issue raised by Melanie, which is to do with what targets should be set to manage the UK economy.
    If one can't contribute to a discussion on a particular topic perhaps it's better to remain quiet and not make it obvious.

  • rate this

    Comment number 227.

    Compared to the cost of bailing out the banks, continuously too, the cost of HS2 is a bargain. Puts money into workers pockets too.
    Looks good for Cameron, Gideon too.

    How soon before we get HS3, HS4, HS5 ...???

    All to spread high property prices out of London to the regions. To reignite housing booms. To save the banks. To save face.

    Hasn't worked for Osborne so far has it?

  • rate this

    Comment number 226.

    I wonder if we will end up with a food bank of England, they seem to have branches popping up all over the country, So many potatoes to the euro, I should imagine the Brussel sprouts will be bogged down in to much bureaucracy.

  • rate this

    Comment number 225.

    'Companies are having to fill pension deficits resulting from the Bank of England's policy of quantitative easing (QE) instead of growing their business, MPs have been told'

    Yet another own goal in the protection of the sacred cow financial sector. How long before the taxpayer has to subsidise this shortfall as well? Osbornes time is up, he has shown he is inept and out of his depth, bye bye.

  • rate this

    Comment number 224.


    Got that right.
    How times have changed. Poor old Al Capone ended up in Alcatraz, just look what he missed out on!
    Oh for the good old days when you could spot these types of 'businessmen' by the black mask they wore, the pistols they brandished and the horse they rode.

  • rate this

    Comment number 223.

    I guess Carney will come in and continue the BOE`s experiments on the UK economy..

    Something wil have to replace QE..

  • rate this

    Comment number 222.

    @218 fbl

    But, surely in country with 1.3bn and little unemployment, labour s/b very expensive, whereas in UK with popn of 65m and 2.5m unemployed, cost of labour s/b very cheap? ;-)

  • rate this

    Comment number 221.

    Osborne and assorted neerdowells simply want to be able to say that things worked out OK on his watch. The reality is that he doesn't know what to do. This is reinforced by the thinking others who have come to the conclusion that it is better to keep off doing anything.
    This in turn suits Osborne down to the ground. Since he is incapable anyway.
    They all are.

    He just wants plaudits. From his chum

  • rate this

    Comment number 220.


    Thems the rewards for success.

    But for failure the risks are comparable. Execs risk their jobs, or even their knighthoods. Not their ill gotten gains, pensions,, careers or liberty of course. That would be simply awful.

  • rate this

    Comment number 219.

    "In June 2012, Barclays was fined £290m by UK and US regulators for attempting to manipulate Libor, an interbank lending rate which affects mortgages and loans.

    The former head of the bank received around £18m in salary, bonus, benefits and vested long-term share awards in 2011, including almost £2m as a bonus"

    Oh dear oh dear! All still not well in the land of the sacred cows.

  • rate this

    Comment number 218.

    @207 US - I would agree that western europe has been good at adding costs some of which add value to somebody somewhere (often but not always to satisfy some rent seeking vested interest) and some which don't add value to anyone anywhere. And that has made matters worse, but the fundamental is the additional supply of labour.

  • rate this

    Comment number 217.

    Immigration is indeed an emotive subject %

    The impact of immigration is always time and place specific..

    The skills of the immigrants..
    The skills of existing workers..
    The make up of the eonomy and labour force.

    If the circumstances of the above meet positively . immigration can lead to increased investment, growth in labour sectors, productivity and demand...and higher wages

  • rate this

    Comment number 216.

    There seems to be a pattern emerging regarding the financial sectors in every economy...
    "Barring a swift and significant reduction in the burden of banking-sector-related debts, Ireland is facing into a decades-long economic stagnation, putting at risk the country's ability to sustain private and public debts servicing,"

    Now, where have we seen and heard this?

  • rate this

    Comment number 215.

    213 DevilsAdvocate

    If you were Spain, Greece, Portugal ... & I were Germany, Finland ..., then I would feel obliged, and perhaps even pleased, to agree to your proposal.

    At least I'd know that I can keep selling you Mercedes, VWs, submarines & all kinds of stuff ... . How many did you say that you would be buying from me next year?

  • rate this

    Comment number 214.


    Sure. Lets do that. I will need an initial setup fee up front...

  • rate this

    Comment number 213.

    1 Hour ago

    The solution was discovered centuries ago. Wealth redistribution
    So how much have you got, and can you post it to a PO Box I'll set up?

  • rate this

    Comment number 212.

    Ahem. Or the reverse.


    Indeed. Specialisation. That comes with obvious dangers We've tried it and our specialism - financial services - havent really shone recently.


Page 1 of 12



BBC © 2014 The BBC is not responsible for the content of external sites. Read more.

This page is best viewed in an up-to-date web browser with style sheets (CSS) enabled. While you will be able to view the content of this page in your current browser, you will not be able to get the full visual experience. Please consider upgrading your browser software or enabling style sheets (CSS) if you are able to do so.