Bank of England governor gives rare TV interview, saying Treasury must not water down its commitment to low inflation
Bank of England governor Sir Mervyn King has warned the Treasury against watering down the commitment to low inflation in the budget next week, describing a return to high inflation as "scary".
King, who leaves office in June, rejected calls for the central bank to put forward more aggressive policies to boost growth at the expense of its current focus on inflation. "I'm not sure there is any call for major change in the remit," he told ITV News. "Most important is the commitment to the target of 2% [inflation]."
The inflation target, which was set by the Treasury in the 1990s, is under threat following months of criticism directed at Threadneedle Street for the weak pace of economic recovery.
King's rare television interview came amid speculation that the chancellor will tell parliament next week in his budget that a review of the Bank of England's mandate is needed to include a requirement to focus on economic growth.
The governor is thought to have lobbied against the move and told ITV: "What was scary when we had high inflation was businesses faced high interest rates … mortgage repayments doubled, there was pressure on household finances … people stopped looking at the long term and focused entirely on the short term."
Earlier, chief economist Spencer Dale had given a speech where he too endorsed the Bank's mandate and said the inflation target still allowed it to take an active approach to boosting growth.
In what appeared to be a co-ordinated attack on the chancellor's plans, Dale described calls for policies to promote growth as "dangerous talk".
"The target is not a sham, but a vital anchor," he said. "We will hit the inflation target. And if we don't hit the inflation target over time, the cost to our economy will be very severe."
The Bank has pumped £375bn into the economy by quantitative easing, mainly through banks and building societies, in an effort to boost lending. A separate £80bn scheme subsidises loans to banks. Figures for last year show that much of the money was used by banks to bolster reserves rather than lent to households and small businesses. But King reiterated his view that there is a case for more electronic printing of money.
The Bank has failed to meet the 2% target for more than three years but blamed items such as the rise in university tuition fees.
Dale also argued against boosting the economy with more central bank loans, arguing that it would trigger inflation.
Markets responded by reversing a three-month decline in the value of the pound, which bounced back to $1.51.
Sterling has declined by more than 7% since the beginning of the year in response to speculation that the central bank will inject further funds into the economy to boost growth.
Constrained by his focus on debt repayments, Osborne has come to rely on King expanding the funds he puts into the economy to support bank lending to households and small businesses.
The governor will be replaced by Mark Carney in the summer and it is understood the Canadian central bank chief is keen to adopt a broader range of measures to kickstart the ailing economy.