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Why the Bank of England Should Target Growth

12 8 2
10.08.2018

OXFORD – The Bank of England raised interest rates to 0.75% this month, in the belief that inflation will exceed its mandated 2% target in about two years. But raising interest rates tends to dampen economic activity, and growth is hardly rampaging in the United Kingdom. Should the BoE consider a change to its mandate to include economic growth?

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In the United States, the Federal Reserve has a dual mandate: price stability and maximum employment. Of course, the Fed has also raised interest rates this year; but the US economy is growing at over 4% and GDP is expected to be around 3% higher this year.

By contrast, the UK economy grew just 0.2% in the first quarter of this year. While the BoE expects growth to rebound and end up at around 1.5% for the year, it describes this rate as the “speed limit.” Faster growth would fuel inflationary pressures.

With UK unemployment at 4.2% – a level consistent with full employment in the BoE’s view – hiring workers will mean higher wages.........

© Project Syndicate