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George Osborne hands Bank of England new remit Bank of England handed new remit in Osborne's budget
(about 2 hours later)
The Bank of England has seen a dramatic change to its remit for the first time in nearly a decade, as chancellor George Osborne seeks help from the central bank to drive an economic recovery.The Bank of England has seen a dramatic change to its remit for the first time in nearly a decade, as chancellor George Osborne seeks help from the central bank to drive an economic recovery.
Osborne said Threadneedle Street will be able to balance a more flexible inflation target with wider growth considerations. The bank will also be able to give guidance over the future path of interest rates, so it can tell the market if it intends to keep rates low for a specific period of time, in the style of the US Federal Reserve.Osborne said Threadneedle Street will be able to balance a more flexible inflation target with wider growth considerations. The bank will also be able to give guidance over the future path of interest rates, so it can tell the market if it intends to keep rates low for a specific period of time, in the style of the US Federal Reserve.
He said the central bank may consider it "necessary to deploy new unconventional policy instruments or approaches in future, including some of those deployed by other central banks in recent years".He said the central bank may consider it "necessary to deploy new unconventional policy instruments or approaches in future, including some of those deployed by other central banks in recent years".
The chancellor said both the outgoing governor of the Bank of England, Sir Mervyn King, and his successor, Mark Carney, had agreed to the changes in the bank's remit.The chancellor said both the outgoing governor of the Bank of England, Sir Mervyn King, and his successor, Mark Carney, had agreed to the changes in the bank's remit.
Under the new regime, the Treasury said the joint objectives of the Bank of England would be "to maintain price stability" and "support the economic policy of [the government], including its objectives for growth and employment".Under the new regime, the Treasury said the joint objectives of the Bank of England would be "to maintain price stability" and "support the economic policy of [the government], including its objectives for growth and employment".
The move to a more flexible target largely formalises the current state of affairs. Price growth, as measured by the consumer price index, has been running above its 2% target for the past four years and the Bank of England believes it will rise further to around 3% during 2013.The move to a more flexible target largely formalises the current state of affairs. Price growth, as measured by the consumer price index, has been running above its 2% target for the past four years and the Bank of England believes it will rise further to around 3% during 2013.
On Wednesday, the Office for National Statistics said inflation rose to a nine-month high of 2.8% in February, adding to the squeeze on consumer spending power, which could dampen growth prospects over the coming months.On Wednesday, the Office for National Statistics said inflation rose to a nine-month high of 2.8% in February, adding to the squeeze on consumer spending power, which could dampen growth prospects over the coming months.
When inflation moves away from the 2% target by more than one percentage point, Osborne said the governor of the Bank of England will still be required to write an open letter to the Treasury explaining why. But the governor will now be able to wait until the publication of the minutes of the monetary policy committee meeting before writing this letter, in order to give a fuller explanation than in the past.When inflation moves away from the 2% target by more than one percentage point, Osborne said the governor of the Bank of England will still be required to write an open letter to the Treasury explaining why. But the governor will now be able to wait until the publication of the minutes of the monetary policy committee meeting before writing this letter, in order to give a fuller explanation than in the past.
The chancellor also signalled a potential expansion of the Funding for Lending Scheme, which is designed to ease borrowing for first-time buyers and small businesses. Osborne said: "We are now actively considering with the Bank of England whether there are potential extensions to the successful Funding for Lending Scheme that will boost lending still further."The chancellor also signalled a potential expansion of the Funding for Lending Scheme, which is designed to ease borrowing for first-time buyers and small businesses. Osborne said: "We are now actively considering with the Bank of England whether there are potential extensions to the successful Funding for Lending Scheme that will boost lending still further."
The government first instructed the Bank of England to target inflation in 1992. The Bank was granted operational independence over monetary policy in 1997 and its mission has remained little changed since then, apart from a tweak to the targeted measure of inflation in 2003.The government first instructed the Bank of England to target inflation in 1992. The Bank was granted operational independence over monetary policy in 1997 and its mission has remained little changed since then, apart from a tweak to the targeted measure of inflation in 2003.
Traders had already positioned themselves for a change in the Bank's remit. Prices of inflation-linked government bonds rallied sharply over the past week, pushing yields down to record lows.Traders had already positioned themselves for a change in the Bank's remit. Prices of inflation-linked government bonds rallied sharply over the past week, pushing yields down to record lows.