Will the Bank of England stop targeting inflation?

It’s all change at the Bank of England next year.

Current governor Mervyn King is stepping aside and being replaced by Mark Carney, currently governor of the Bank of Canada.

With a new change in leadership, many commentators are expecting a shift in policy.

In a speech this week, Carney suggested that central banks should stop focusing on price inflation and instead target economic output.

As things stand, the Bank of England has a mandate to meet an inflation target of 2%, something they have consistently failed to achieve in recent years.

Carney believes a shift in mandate to focus on gross domestic product (GDP) that has not been adjusted for price inflation would make more sense in an environment where interest rates were close to zero.

What would this radical shift in monetary policy mean for your Financial Planning?

The Bank setting better expectations could help with longer-term planning.

For example, if you knew for sure that interest rates would not increase from their current level of 0.5% until CPI price inflation tipped 5%, you might be more inclined to use cash saved from lower mortgage payments to save, spend or repay debt.

The more people who felt confident spending their money, the more quickly the economy would recover.

We look forward to hearing more from Mark Carney as we get closer to the start of his new role.

Photo credit: Flickr/Simon Liescheke