Governor Mervyn King and successor Mark Carney urged to follow aggressive approach of US Federal Reserve
Sir Mervyn King's position as Britain's most important unelected official was bolstered on Wednesday after the chancellor handed the Bank of England governor and his successor Mark Carney a wider set of powers to boost Britain's economy.
George Osborne said King had agreed to overhaul the Bank's 20-year policy of targeting inflation, in favour of a dual remit that included supporting growth and employment.
Giving a glimpse of his growing frustration with the lack of action, he said Threadneedle Street needed to follow the US Federal Reserve's more aggressive approach in tackling the lack of lending by major banks.
City investors praised the move, which they said would give the central bank the firepower it needed to get cheap funds into an economy that has been starved of loans following the banking crash of 2008.
King is expected to press on with the development of more unconventional policies to boost lending, though mortgage holders and businesses are unlikely to see any sudden changes from the monetary policy committee, which sets interest rates and determines how much money is injected into the economy.
The MPC has refused to add to its £375bn policy of quantitative easing, despite votes from King and two other committee members in February and this month in favour of an extra £25bn.
Under the new remit, Osborne will force the MPC to consider the trade-offs between inflation and output, which has proved volatile. Recently, the MPC has pulled back from injecting further funds into the economy when inflation appears to be on the rise. It has also adopted conservative policies that involve only buying ultra-safe UK government bonds.
Osborne wants committee members to stick with their pro-growth policies despite temporary spikes in inflation and to adopt a wider range of policies. Options include buying mortgages from the banks, which would free them to make new loans. More likely is another Federal Reserve policy, which involves setting a clear target that unemployment must be lower than before any rise in interest rates.
Fed boss Ben Bernanke has pledged to keep interest rates at 0.25% until unemployment drops to 6.5%, which is not expected until next summer at the earliest. Bernanke was expected to repeat his pledge on Wednesday night despite a recovery in the US economy's fortunes that has bucked several bouts of wrangling in Washington.
Carney, currently the Canadian central bank boss, takes up his role as Bank governor in the summer and has signalled his willingness to adopt more aggressive tactics to boost the amount of money circulating in the economy.
Dario Perkins, an economist at Lombard Street Research, said the MPC's new "operational independence" meant Carney and the MPC would choose what tools to use and the Treasury would always be obliged to provide whatever indemnities were required. But he was sceptical that monetary policy would take up the slack left by the Treasury.
"The new remit will give Mark Carney a little more flexibility to boost the economy but it doesn't fundamentally change UK monetary policy. Moreover, because the government won't want to change the remit often – once every 10 years has been the norm – those hoping for more radical policy shifts could now be waiting a very long time. "
Groups representing savers said the plans favoured borrowers at the expense of people who were prudent. UK base rates have been at 0.5% for the past four years. They said the new remit appeared to indicate that rates would remain low for several years to come.