(Bloomberg) -- The pound could get a boost if the UK government opts to tighten the Bank of England’s inflation mandate, according to Deutsche Bank economist Sanjay Raja.
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Liz Truss, who is leading in the race to replace Boris Johnson as prime minister, has vowed to review the policy remit with inflation now running at more than five times the 2% target. While she hasn’t said specifically what that might include, her allies have mentioned a nominal GDP goal.
Raja wrote a note to clients last week setting out potential options, echoing concerns that targeting GDP could damage the BOE’s credibility on fighting inflation if adopted. However, lowering the current goal of keeping the consumer price index rising by 2% a year at all times could lift the currency.
“While a stricter inflation target would add to the bank’s current hawkish leaning, it’s unclear how much of an effect this would have on near-term policy,” Raja wrote.
The BOE’s current inflation target is symmetric, meaning readings below and above 2% are equally undesirable. Raja speculates the government could adopt an asymmetric target, where inflation is “below but close to 2%” as the European Central Bank had in previous years.
That also “could skew the bank’s bias toward tighter policy going forward,” the economist wrote.
He said Truss, if she wins, might announce a formal consultation about the BOE’s mandate along with an emergency budget, possibly on Sept. 21, with results coming in the Treasury’s spring statement at the latest.
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