Time to rethink inflation targeting: AllianceBernstein

The UK should adopt a broader monetary policy when it comes to targeting inflation, like Australia and China, according to AllianceBernstein economists in Europe.

The broader approach to monetary policy management, adopted by the People’s Bank of China (PBOC) and the Reserve Bank of Australia (RBA), bases its interest rate decisions on several factors, including money, credit and asset prices as well as consumer price inflation (CPI), according to economist Darren Williams.

Williams said the Bank of England’s narrow focus on CPI — while regarded as a spectacular success for most of the last two decades — did not prevent the biggest economic and financial collapse since the Great Depression.

“In fact, this focus may have contributed to it,” Williams said.

In his paper, “Money Talks: Broadening the UK’s Monetary Policy Framework”, Williams pointed out that consumer prices in the UK rose 17 per cent between 1997 and 2007 from a purely CPI perspective.

“During the same period, however, broad money increased by 111 per cent, bank lending by 155 per cent, house prices by 197 per cent and stock market prices by 48 per cent,” Williams said.

“In short, this was one of the most inflationary periods in British economic history — the only indicator that didn’t show this was the CPI,” he added.

Melbourne-based senior economist for Asia-Pacific, Guy Bruten, claimed the policy challenge to developed-market central banks posed by rising volatility might have been underestimated.

He agreed that a broad approach to managing financial and economic stability provided greater flexibility in a volatile environment.