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Britain keeps Bank of England inflation target

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(Globalpost/GlobalPost)

Britain refrained from altering the Bank of England's inflation target on Wednesday, despite concerns that GDP would be a more sensible measure, but gave it more leeway to boost economic growth.

Finance minister George Osborne announced in his annual budget speech that the central bank's remit would be overhauled for the first time in almost a decade.

Chancellor of the Exchequer Osborne said the new remit would allow the BoE's rate-setting monetary policy committee (MPC) room to loosen policy by focusing on growth and exploring "unconventional" measures.

"I want to make sure that an active monetary policy plays a full role in supporting the economy," Osborne told parliament in his 2013/2014 annual budget.

"So I am today setting out an updated remit for the Monetary Policy Committee. Alongside it, we're publishing a review of the monetary policy framework."

Osborne added that the BoE would also be permitted more leeway in how quickly it brings annual inflation back to its 2.0-percent target if there are unexpected shocks in the economy.

There had been speculation that Osborne would use Wednesday's budget to switch the BoE's target to help boost British gross domestic product (GDP).

The central bank's monetary policy committee (MPC) is charged with setting interest rates with a view to keeping 12-month inflation close to 2.0 percent.

Osborne added that the inflation target would remain but the MPC would also be charged with explaining "clearly" how long it would take for inflation to reach this level.

"The new remit explicitly tasks the MPC with setting out clearly the tradeoffs it has made in deciding how long it will be before inflation returns to target," he said.

The new remit would also recognise the role of "unconventional" measures, like the BoE's quantitative easing (QE) stimulus programme under which it creates cash to buy assets such as bonds with the aim of boosting lending.

"The new remit also recognises that the Monetary Policy Committee may need to use unconventional monetary instruments to support the economy while keeping inflation stable," said Osborne.

"And it makes clear that the committee may wish to issue explicit forward guidance, including using intermediate thresholds in order to influence expectations on the future path of interest rates."

In the run-up to the budget, incoming BoE governor Mark Carney - who takes up his role in July - had suggested that GDP could replace inflation as the bank's target measure.

Current BoE governor Mervyn King and Carney have meanwhile both agreed to the new remit.

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http://www.globalpost.com/dispatch/news/afp/130320/britain-keeps-bank-england-inflation-target