BOE Bond-Purchase Plan Risks Inflation Credibility, Besley Says

The Bank of England’s bond-purchase program may jeopardize its inflation-targeting credibility because it blurs the divide between fiscal and monetary policy. The 200 billion-pound ($307 billion) program has made the bank a creditor of the government and allowed the Treasury an element of oversight over its decisions, diminishing its independence. The focus of the plan on gilt purchases also has given the bank a goal of supporting the government bond market.

Multiple policy commitments may undermine the public’s perception that the bank is committed to holding annual gains in consumer prices at 2 percent, the authors said. The bank’s inflation-targeting framework may come under pressure as the economy struggles to emerge from the recession, they said. Inflation targeting depends not so much on that separation being achieved but the public believing that it’s going to be achieved going forward, and that’s where the greatest risk lies.