Rishi Sunak should scrap Bank of England inflation target to focus on GDP growth, says Jim O'Neill

Lizzy Burden
Bank of England and pound sign

One of Britain’s most prominent economists has urged Rishi Sunak to scrap the Bank of England’s inflation target to make economic growth its primary goal as Britain attempts a recovery from the pandemic.

Lord Jim O’Neill, a former Treasury minister who is understood to be in talks with the Government about the creation of a new state investment board for the North, called on the Chancellor to change the Bank’s remit to target nominal GDP instead of inflation. In an interview with The Sunday Telegraph, the former Goldman Sachs chief economist suggested the radical move would help engineer a V-shaped recovery from the coronavirus recession.

Sources with knowledge of discussions in the Treasury said officials were cautious about tampering with institutions at the height of a global economic crisis, but that the Chancellor’s advisers were more open-minded.

“In the last couple of months, the Bank of England’s significant shift on monetary financing and the whole debate around monetary and fiscal policy has come back to the fore and there has been noise about NGDP,” one said. “My instinct is that one of Rishi Sunak’s team, or the Chancellor himself, might be commissioning advice on it.”

“As we’ve seen now and in 2008, a lot of conventional economists and an inflation-targeting type of framework aren’t really relevant for dealing with the challenge,” Lord O’Neill told broadcaster Econ Films’ CoronaNomics programme.

“It wouldn’t guarantee a V-shaped recovery but it would certainly increase the probability of one. I do suspect there are some people around the Treasury that are probably thinking about things like this.”

NGDP is the value of all goods and services produced in the economy, unadjusted for inflation. Early advocates of targeting it included James Meade, the Nobel Prize-winning British economist, in 1978. The idea was mooted again in a speech by Mark Carney shortly before his appointment as the Bank’s governor in 2013, only to be rejected by the Treasury.

Giles Wilkes, a former Downing Street economic adviser, dismissed the idea that the Chancellor would be moving the goalposts by shifting the Bank’s focus away from its 2pc inflation target.

He said: “Winning’s all that matters. People said the same about going off the gold standard in the Thirties but it was the necessary condition to stop strangling the economy. It looked like it was cheating but going off the [European Exchange Rate Mechanism] peg in 1992 boosted the economy instantly by raising people’s expectations of the future pathway.

“It would be radical but everybody’s in a better position if the economy’s growing more, and those low interest rates are not a good sign that things are prosperous.”

Sunak and Bailey vs coronavirus

The Reserve Bank of Australia and the US Federal Reserve already have targets in addition to inflation. The Fed, for instance, pursues full employment alongside price stability. But Li Keqiang, the Chinese premier, said last week that the country had been forced to abandon its long-standing policy of setting a target for economic growth this year because of “great uncertainties” over the virus and world trade.

James Smith, research director of the Resolution Foundation think tank, who previously worked at the Bank of England and in the civil service, said NGDP would be difficult to target, given the data is released quarterly with a long lag and is frequently revised. Given policy interest rates are so low, he said: “The problem is more about instruments rather than targets.”

The Treasury did not respond to a request for comment.