* Bank of England gets biggest change to remit since 1997
* BoE still to target 2 pct consumer price inflation
* Carney may push for long-term policy commitments
* Trade-offs between inflation and growth to be clearer
* Change represents "evolution rather than revolution"
By David Milliken
LONDON, March 21 British finance minister George
Osborne has laid the groundwork for a partial revamp at the Bank
of England when new Governor Mark Carney arrives in July, but
more radical options remain off-limits.
Trying to keep consumer price inflation at 2 percent will
continue to be the central bank's main job, even after the
biggest change to its monetary policy remit since it gained
operational independence in 1997.
The new mandate Osborne announced on Wednesday is in many
ways a tidying-up exercise, giving formal backing to the central
bank's current practice of letting inflation overshoot its
target if the alternative would be an economic slump.
Carney may also be able to import new tactics such as making
long-term commitments to low interest rates which he has
championed at the Bank of Canada and have found favour at the
U.S. Federal Reserve.
Britain's economy has been stagnant for the past two years,
in the face of Bank of England bond buying and schemes to boost
lending, fuelling speculation Osborne could order major change.
But despite his mantra of "monetary activism with fiscal
responsibility", Osborne did not ask the central bank to target
growth as well as inflation, stressing "the primacy of price
stability and the inflation target".
The head of Britain's debt agency - who will be responsible
for selling around 151 billion pounds of government bonds in the
coming year to fund the country's budget deficit - told Reuters
the news would reassure investors.
Some in financial markets had speculated Osborne could ask
the BoE to adopt a Fed-style dual growth and inflation mandate,
or to target a new measure of inflation which includes housing
costs and has been persistently lower than the existing measure.
The pound rose in value against the dollar on Wednesday
after the remit announcement as investors took it to represent a
smaller move than some had feared.
"The new remit is more a clarification than a change in
mandate," said Investec economist Philip Shaw. "The changes are
sensible, and therefore welcome ... but at this stage it is
difficult to conclude that they represent a shift to 'monetary
activism' as the chancellor claims."
Ed Balls, finance spokesman for the opposition Labour party,
quipped that it was Osborne who needed to change his remit, not
the BoE, and a senior Treasury official acknowledged that the
new remit amounted to "evolution rather than revolution".
The British central bank has been innovative since 2009,
when it launched a programme of asset purchases with newly
created money - also known as quantitative easing - which has
sucked up 375 billion pounds of government debt to date.
The biggest change in the new remit is a request for the
central bank to publish a report in August into the merits of
using so-called "state-contingent intermediate thresholds".
Translated into plain English, this could mean committing to
buy more government bonds until unemployment falls below a
certain level or inflation rises well above its target.
The Fed and the Bank of Canada have done this sort of thing
since the financial crisis. But the BoE has avoided it because
of doubts over whether it was consistent with its remit, and a
strong reluctance from long-serving Governor Mervyn King and
other officials to pre-commit to policy moves.
The Bank of England may find it easier to make this change
when Carney arrives, said Rob Wood, a former BoE economist who
now works for Berenberg Bank, possibly easing the launch of more
"The chancellor has crossed his fingers and is waiting for
the cavalry, in the shape of Mark Carney, to come and save the
day," he said.
"Forward guidance is Carney's calling card. As practised by
the Fed, an example Osborne specifically referred to, guidance
comes hand in hand with further asset purchases, so we continue
to expect ... more asset purchases after Carney takes over."
However he will still have to get the other eight members of
the Monetary Policy Committee (MPC) on board, which may prove
tougher than in Canada.
Not only are MPC members encouraged to make their
disagreements about the right course for policy public - unlike
in Canada - but some have said they see little reason for
markets to believe long-term policy commitments that are
intended to outlast the policymakers themselves.
Shortly before the new remit was published on Wednesday
minutes of the BoE's last policy meeting showed officials split
over further asset purchases. Some worried they could further
weaken sterling, which has already lost around 7 percent against
the dollar this year, and push up inflation.
Other changes to the remit are more minor, and are likely to
find greater consensus on the MPC.
The new remit makes clearer that inflation may sometimes
exceed its target, but also places a greater onus on the MPC to
explain what trade-offs it is making when it allows inflation to
The MPC must also take account of the BoE's new financial
supervision powers which come into force in April.
Although another bank committee has most of the tools to
control financial bubbles, the MPC is also now allowed to take
action such as raising interest rates to pop an asset bubble if
other tools fail.