Tuesday, 23 February 2010

Sterling takes a beating on Mervyn King's downbeat assessment

"Mervyn King’s last appearance before the election in front of the Commons Treasury Select Committee, which has just concluded, was a bit of a disappointment. This was not because Mr King and his Monetary Policy Committee colleagues gave a poor account of themselves in answering questions about the latest Inflation Report, but because the Committee failed to ask the right questions.To my mind, the two key questions were these: what is the trade off between monetary and fiscal policy likely to be after the election, or in other words, can there be reasonable certainty that the zero interest rate policy will be maintained through much of the next parliament if the new government embarks on the sort of fiscal consolidation demanded by the credit rating agencies, which is elimination of the deficit within five years; and secondly, is there a case for permanently adjusting the inflation target to allow the persistence of loose money conditions? This latter question is another way of asking whether narrow inflation targeting as the over-riding objective of monetary policy has been discredited by the crisis."

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