By Mark Wallace
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Mark Carney's first major announcement as Governor of the Bank of England contains the kind of message you would expect from someone standing for election, rather than a technocrat with targets to hit.
His new approach to monetary policy adds in unemployment to the consideration of what to do with interest rates, joining inflation as a priority in the MPC's equation.
Targeting unemployment not only appeals to popular concerns, but it does make sense as an indicator of spare capacity in the economy.
However, building in a consideration of the level of unemployment cannot be done in a meaningful way without watering down the importance of controlling inflation. We are in danger of forgetting the dangers of inflation to economic health, and the evils of inflation when it comes to robbing savers, workers and pensioners of the fruits of doing the right thing.
For some, of course, inflating away the national debt might be quite convenient – but to do so would be utterly wrong.
Carney includes a caveat about still intending to ensure that inflation doesn't rise too fast, but in such a situation one of two things would happen:
- He would refer to whether unemployment is above 7% before making a decision on interest rates – in which case the importance of inflation has been downgraded
- He would recognise that inflation rises make action on interest rates necessary, regardless of the level of unemployment – in which case today's announcement is mere fluff rather than a change in policy
Presumably he means what he says, and intends to take the former approach.
It is not so long ago that rampant inflation beggared people whose careful financial planning should have set them up for a comfortable retirement. That caused human suffering in the short term and caused economic harm in the long term by deterring people from working and saving.
We all know the impact that above-target inflation is having on the cost of living right now, too.
The new policy also fails to consider that the interest rate is only one of a host of influences on unemployment – business and personal taxes, employers' red tape, the benefits system and other factors all have a huge impact, and they are outside Carney's control. Putting monetary policy to this use is like trying to lift a car by its wing mirror – it might have some effect, but the inefficiency of the approach requires you to push way too hard to get even a little movement.
That the lever at his disposal is very limited in its impact on unemployment will only encourage the MPC to overuse it – further increasing the risk to inflation. For that reason, I'm inclined to agree with the Institute of Economic Affairs that the decision, while well-intentioned, is dangerous.