John McDonnell: Bank of England could target unemployment rate under Labour
A Labour government would consider changing the mandate of the Bank of England to make it target unemployment as well as inflation, the shadow chancellor said today.
Labours John McDonnell reiterated that the Bank would retain its independence if he were to become chancellor, but said that its target could be adjusted.
Other major central banks already explicitly target unemployment: the US Federal Reserve is the most prominent example, with a duty to foster “maximum employment” as well as price stability.
Read more: John McDonnell says BoE to stay independent under Labour
McDonnell said a review of the Banks role by economist Graham Turner would likely result in a change in formal Labour policy on the monetary policy mandate.
“We want to stimulate a debate around the mandate itself,” he said, although he added that introducing an unemployment target was one of a number of options.
“Im quite attracted by the wider mandate there is in America,” he said.
McDonnell has previously floated the possibility of changing how the Bank works, suggesting a range of possible options for changes in 2015 which included “formalising” the trade-off between low and stable inflation and low unemployment.
Read more: Debate: Should the Bank of England scrap its two per cent inflation target?
Economic textbooks say that lower unemployment will generally be accompanied by higher inflation in wages and vice versa, a relationship known as the Phillips curve – although economists have been stumped in recent years by the failure of inflation to pick up markedly in some developed economies even as unemployment has fallen steeply.
The monetary policy mandate set by current chancellor Philip Hammond already gives a nod to a need for “strong, sustainable and balanced growth”, after former chancellor George Osborne gave some leeway to the Bank to consider the short-term implications on growth of monetary policy.
The Bank's inflation target has already faced criticism from both sides of the political spectrum, although Bank officials in public have said it is the best way to ensure financial stability and longer-term growth.
Read more: Replace Bank of England inflation target with nominal GDP says think tank
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