I think it would be a mistake to extend the Bank of England’s targets for a number of reasons. Central bankers should only concern themselves with sound money which includes inflation and, if they have got the authority to regulate it, the safety of the financial system. Any targets other than those, such as promoting growth or employment, takes them into territory which should be reserved for elected politicians and would only serve to confuse or conflict with their core mandate. Indeed, the core role of central bankers is to prevent politicians, most or all of whom seem to have (re)election as their main aim, perverting the currency and/or the financial system in pursuit of their careers.
I discussed this topic on the BBC Radio 4 Today Programme last week. You can listen to the interview in full here (click forward to 1:51).
I think it is premature for George Osborne to have declared that Mr Carney is the outstanding, preeminent central bank of his generation. Canada’s good performance during the credit crisis cannot be attributed to him as he only became Governor in 2008 by which time the die was well and truly cast. Canada’s success owes far more to the foundations from the actions of the Canadian government which took office in 1994 and resolved to turn a deficit of 10% of GDP into a surplus which it achieved in three years. It is also worth noting that Mr Carney will leave his post after rapid inflation of Canadian property prices which looks like it may cause a problem.
Mr Carney has the advantage of youth. He has the disadvantage that he has never lived through a period of high inflation. But he may get to do so. The debate about central bank policy aims which he sparked comes hot on the heels of the Fed doubling the size of its monthly purchase of bonds in its programme of Quantitative Easing and proclaiming that it will continue with this policy until employment falls below 6.5%. It was swiftly followed by the landslide election victory of the LDP in Japan who say they will tell the Bank of Japan to pursue a 3% inflation target in order to promote growth.
None of these people fear inflation, which is exactly the time when it is likely to re-emerge. If it does so, it may not stop at convenient pre-ordained levels which these newly mandated central bankers are aiming for and if it does run out of control what levers will they pull to halt it? Raising interest rates? That would have an interesting effect on government finances and the economy.
In my view the world’s most outstanding extant central banker is Paul Volcker. Take a look at his track record on these matters.