Father Of UK Inflation Target Says ‘Terrible Error’ To Drop It

 The BOE is battling criticism that it has lost control over inflation. Former Chancellor of the Exchequer Norman Lamont, who introduced the...

 The BOE is battling criticism that it has lost control over inflation.

Former Chancellor of the Exchequer Norman Lamont, who introduced the UK’s first inflation target in 1992, said it would be a mistake to abandon the measure in favor of a money supply goal, in an implicit criticism of proposals by Liz Truss, the front-runner to be Britain’s next prime minister.

Truss, the foreign secretary, has repeatedly suggested she’ll re-examine the Bank of England’s remit of targeting a 2% inflation rate if she becomes prime minister next month, blaming the UK’s soaring prices on the country’s monetary policy. Last month, she said the country hasn’t been “tough enough” on monetary supply.

“It would be a terrible error to drop inflation targeting and substitute money supply,” Lamont said on Monday in a phone interview, adding that the policy was attempted when Margaret Thatcher was in power in the 1980s and abandoned because it didn’t work. “It can’t be your only lodestar for policy.”

Lamont’s comments buttress the argument by Truss’s rival, Rishi Sunak, that the BOE has largely been successful in achieving the inflation target since the bank was granted operational independence by Labour’s chancellor, Gordon Brown, in 1997. Truss enjoys a double-digit poll lead and appears on track to succeed Boris Johnson when the Tory party announces its new leader on Sept. 5.

Sunak -- who was chancellor until he quit last month, helping precipitate Johnson’s downfall -- has said he’s “worried” by some of Truss’s proposals. But the foreign secretary argues it’s reasonable to revisit the bank’s mandate, especially in the light of inflation at a four-decade high.

To be sure, Truss hasn’t said she’d scrap inflation targeting, but since making her initial remarks last month, she’s mentioned the possibility of widening the BOE’s goal to include a measure of money supply -- which some economists argue is a key driver of inflation -- or gross domestic product. After the BOE last week said inflation is set to surpass 13% later in the year, Truss wrote in the Sunday Telegraph that the inflationary spike was “exacerbated by monetary policy.”

Changing Times

“The Bank of England’s mandate was last set in 1997 under Gordon Brown in very different economic circumstances,” Truss wrote. “I fully support its independence but its mandate cannot be bound by the same Brownian consensus twenty-five years on.”

In the early 1980s, Thatcher set money supply targets to grapple with double-digit inflation. The approach was abandoned because the variables were too volatile, said Lamont, who served as a Treasury minister under Thatcher and then as Chancellor of the Exchequer for her successor, John Major. Lamont initially set the inflation target between 1% and 4% but kept reference to the money supply as a measure to be monitored though not explicitly targeted. 

After the BOE was given independence to set interest rates in 1997, its goal was to keep inflation to 2.5% based on the Retail Prices Index. The mandate was changed to 2% using a different measure, the Consumer Prices Index, in 2003. Money supply targets are no longer a prominent part of central bank economic models.

It’s “only right” to look again at the BOE mandate to “ensure it’s fit for purpose and works for the current economic context,” Truss’s team said in a statement.

“I’m not against her reviewing the mandate, but I will be surprised if she makes a significant change,” Lamont said of Truss’s plans. “The problem about adding things to it, if you add lots of extra things, it then becomes a fusion. It all becomes a matter of judgment.”