Bank of England Governor Mervyn King said it may be appropriate to review the UK's inflation-targeting regime, and that government measures to strengthen the economy are needed to underpin a "gentle recovery".
King said the BOE is ready to add more stimulus if needed, though monetary policy is not a “panacea” and more must be done to strengthen banks and implement structural reforms. With his successor, Bank of Canada Governor Mark Carney, having raised the topic of the potential limits of inflation-targeting, King welcomed that public debate. King said his view remains that a long-run 2 per cent inflation target “should be an essential part of our macro-economic framework”, and it would be “irresponsible to lose that". He added that the BOE has the flexibility to allow above-target inflation during slumps.
King added that prolonged use of monetary stimulus may have side effects, including pushing down long-term bond yields to “unsustainably low levels” that pose a risk to financial stability. He said authorities must press on with measures to improve confidence in banks, boost the supply potential of the economy and rebalance domestic demand away from countries with trade deficits to those with surpluses.
Carney, who is scheduled to take over from King on July 1, has discussed the virtues of a nominal gross domestic product target as a policy tool.
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