Andrew Bailey has signalled his support for a more flexible approach to the Bank of England’s inflation target as central banks shift to cope with a “world of much bigger shocks”.
The Bank Governor said shocks since the financial crisis had “necessitated a search for a more flexible form” of policy with the US central bank recently adopting an average inflation target.
“I don’t think changing the target is the right way to think about it but I think it’s appropriate that many of us are thinking about the question of how we achieve the target in a world of much bigger shocks,” he said at the G30 International Banking Seminar.
The Bank of England has a 2pc inflation target but other central banks are moving towards a more flexible approach.
The Federal Reserve has adopted an average inflation target, meaning it will tolerate higher price rises and can leave stimulus in place for longer. Christine Lagarde, European Central Bank president, has also hinted at a similar change as it conducts a strategy review.
Mr Bailey said the Bank needs to combine the “huge benefits” of an inflation target with “a need for more flexibility in putting it into effect in the face of those shocks”.
“This is the right way to think about debates such as is the approach for the future average inflation targeting or having a point in time target with greater flexibility around the choice in the point of time to return to the target.”
The Bank’s remit is set by the Government but the rate-setters already showed some flexibility following the EU referendum as inflation was pushed higher by the pound's slump.
Mr Bailey also reiterated that the risks for the economy are mounting with a “huge gap” still to made up before output returns to pre-virus levels. He estimated that GDP is around 10pc below levels seen at the end of 2019.