Chancellor George Osborne unveiled the first overhaul of the Bank of England’s remit in nearly a decade under plans for “monetary activism” in the face of sharp growth downgrades and higher borrowing.
While confirming the inflation target would remain at 2%, Mr Osborne gave the central bank room to loosen monetary policy by also focusing on economic growth with the freedom to explore “unconventional” measures.
But the changes came as a disappointment to some economists, who had been hoping for more radical action.
The remit review also came against a grim backdrop of lower growth and higher-than-expected borrowing revealed in the Budget as the independent tax and spending watchdog the Office for Budget Responsibility delivered another painful set of forecasts.
The OBR said the UK would narrowly avoid a triple dip recession by eking out growth of 0.1% this quarter, but it halved its growth predictions for the year as a whole to 0.6%, while it said the Government would have to borrow nearly £60 billion more than expected by 2017/18.
In the year to March, the OBR now expects the government to borrow £114 billion, £108 billion in the 2013/14 year, £97 billion in the following year, falling to £87 billion, £61 billion and £42 billion in the following years to 2017/18.
It ruled once more that Mr Osborne will breach his rule that the ratio of net debt to gross domestic product (GDP) will be falling by 2015/16.
Debt as a ratio of GDP will now not fall until 2017/18 – two years later than planned.
Labour leader Ed Miliband said the “bad news just doesn’t stop”, but Mr Osborne said the Government would stand by its austerity plan.
He said: “It is taking longer than anyone hoped, but we must hold to the right track.
“Our economic plan combines monetary activism with fiscal responsibility and supply-side reform. And today we go further on all three components of that plan.”
The Bank’s new remit explicitly allows the Bank to be flexible in its targeting and Mr Osborne has asked the Bank’s Monetary Policy Committee (MPC) to report back on the use of so-called “intermediate thresholds”, such as economic stability measures, in its August inflation report.
Policymakers will also be able to provide forward-looking guidance on rates and inflation.
Mr Osborne said Bank governor Sir Mervyn King and his successor Mark Carney, who takes over in July, had agreed to the new remit and for the MPC to use “unconventional monetary instruments”.
In a brief letter to Mr Osborne, Sir Mervyn said the changes were “sensible” and contain “useful improvements to the framework”.
But economist Vicky Redwood at Capital Economics said the changes were “not as bold” as many had expected.
She said: “With the fiscal measures unlikely to do much for the economy, responsibility for boosting the recovery remains with the Bank of England.
“At least Mr Osborne did a bit to help in this respect, altering the Bank’s remit so that it can use unconventional tools and employ forward-looking guidance to influence interest rate expectations.”
However, she added the remit change was unlikely to deliver the boost needed to kick-start the recovery, forecasting growth of just 0.2% this year.