Mais Lecture - Leaning on the MPC

Rules are there to be broken? Or to use the modern parlance, rules are there to be observed with ‘constrained discretion’!

The Bank of England is supposed to be operationally independent of government - true the government sets the inflation target (currently CPI inflation of 2 per cent) but the convention has been that the state does not lean on the Monetary Policy Committee when it comes to making interest rate decisions. Last night’s Mais Lecture at the Cass Business School marked a change of approach by Chancellor Alastair Darling.

Not only did he conveniently relax (ditch?) Brown’s cherished fiscal rules on government borrowing, but Darling also gave the strongest possible hint that the inflation target should not be viewed with rigidity at a time of economic and financial turmoil.

“To apply these rules rigidly in today’s changed conditions would be perverse. The combination of the global credit crisis and the surge in commodity prices is unprecedented.”

“Our monetary policy framework is , as the governor (Mervyn King) pointed out in his Mais lecture three years ago, based on constrained discretion. Inflation will come back to its 2% target - a credible commitment. But there is also “discretion about the horizon over which inflation is brought back to target.”

A green light for the Bank of England to continue their rate cutting next week - David Blanchflower argues that we need to race to the floor with interest rates to avoid a prolonged depression.