The Bank of England is not indifferent to the level of sterling, its governor said on Friday, giving a boost to the battered pound which has slumped in value since British voters decided to leave the EU in June.
He also said the bank would tolerate slightly higher inflation than its formal target if necessary.
"Our job is not to target the exchange rate, our job is to target inflation," Mark Carney said during a public meeting in the Nottingham.
“But that doesn’t mean we’re indifferent to the level of sterling. It does matter, ultimately, [for] inflation and over the course of two to three years out, so it matters to the conduct of monetary policy.”
Sterling rose on Mr Carney’s comments, giving it a little relief after falling nearly 20 per cent against the US dollar since the referendum because of concerns among investors that Britain’s economy will suffer from Brexit.
It gained half a cent to turn flat on the day against the dollar at $1.2252 immediately after Mr Carney’s remarks. It also gained 0.3 per cent on the day to trade at 89.95 pence per euro.
The Bank of England has previously signalled it is likely to cut interest rates below their already historic low of 0.25 per cent in order to help the economy cope with the shock of the Brexit vote.
But since those signals from the bank the pound has extended its slump which is likely to further push up the price of imports and Britain’s inflation rate. The Bank of England’s next announcement on rates is due on November 3rd.
Many factors
Deputy governor
Ben Broadbent
, speaking at a separate public meeting on Friday in the city of Derby, said the fall in the value of the pound was important for inflation, but the Bank of England had to look at many factors.
Mr Carney said he was willing to allow inflation to run “a bit” higher than the central bank’s 2 per cent target in order to help employment and allow Britain’s economy to grow.
British inflation is expected to rise above 2 per cent next year because of the sharp fall in the value of the pound. At the same time the economy is expected to slow.
“We’re willing to tolerate a bit of an overshoot in inflation over the course of the next few years in order to avoid [rising unemployment], to cushion the blow and make sure the economy can adjust as well as possible,” Mr Carney said.
He made the comments at a meeting with representatives of civic groups, one of several being held on Friday by senior Bank of England officials to explain the work of the bank to the public.
He said the inflation environment in Britain was “going to change”, making things more difficult for the country’s most vulnerable households.
