As the Chancellor delivers her Spring Statement today – or, to call it what it really is, an emergency Budget – and declares for the umpteenth time that growth is this government’s defining mission, I can’t help but ask: where is monetary policy in this conversation?
Tax and planning reform, net zero initiatives, public investment – all the expected levers are being pulled. Yet the Bank of England’s central role in shaping economic conditions is treated as peripheral. It isn’t. And in my new paper for the Institute of Economic Affairs (IEA), I make the case directly: if ministers are serious about delivering growth, they need to re-examine the monetary framework steering the economy.
In ‘Rethinking Monetary Policy’, I argue that the Bank of England’s 30-year-old commitment to inflation targeting is no longer the best regime for the UK. Instead, I propose a shift to nominal GDP (NGDP) targeting – anchoring monetary policy not just to prices, but to the overall growth in nominal spending across the economy.
Nominal GDP – the combination of real output and inflation – is a good proxy for household incomes, business revenues and debt-servicing capacity. In a world of heightened geopolitical risk, targeting this broader metric would reduce policy uncertainty by minimising discretionary decision-making, improving transparency, while allowing monetary policy flexibility to manage supply-side shocks more effectively, thereby reducing potential policy errors.
When the UK adopted inflation targeting in October 1992, it made perfect sense. Sterling had just crashed out of the Exchange Rate Mechanism. Trust in monetary stewardship had evaporated. A simple inflation target gave the Bank a clear benchmark – and gave the public a reason to believe price stability could be restored. And, for a time, it worked. Although an inconvenient truth is that globalisation and advances in technology also played a large part.
But that was over three decades ago. Since then, we’ve experienced a financial crisis, a global pandemic, a war on the edge of Europe, energy shocks and a political shift towards protectionism. The economic environment of 2025 looks nothing like that of 1992. Yet the Bank is still working from the same playbook.
Between 1992 and the 2008 financial crash, the economy ticked along at a steady pace: around 3% real GDP growth and 2% inflation (nominal GDP growth of roughly 5%). That figure became a kind of informal benchmark: a pace that kept debt sustainable, supported investment and made monetary policy fairly predictable.
Since then, the rhythm has gone. Growth has been sluggish – and outright diabolical post-Covid. Inflation is more volatile. And after a decade of near-zero interest rates, monetary policy is now having to tighten into stagnation, with structurally higher rates the new norm.
This is where NGDP targeting can help. Rather than fixate on inflation alone, the Bank would aim to keep overall nominal income on a stable path – say, 5% a year. If inflation rises due to external factors, but real growth is flat, monetary policy can hold steady, at least for a time. If both are running hot, the Bank tightens. It’s a more balanced rule – and one that explicitly acknowledges trade-offs, rather than pretending they don’t exist.
Crucially, this isn’t carte blanche to let inflation rip. As I write in the paper, ‘any major deviation from the nominal GDP path – whether driven by prices, output or both – would still prompt a policy response’. NGDP targeting is rule-based. It just incorporates more context than a rigid inflation target.
Its biggest strength is how it handles supply shocks. The pandemic was a textbook case: output collapsed, inflation surged – not because of excess demand, but due to supply-side constraints. Yet the Bank responded by tightening policy, even while the economy was still fragile. Under NGDP targeting, the policy stance might have been more patient and the recovery more secure.
There are political implications too. The Treasury wants investment-led growth. The Bank is keeping policy restrictive and could hike rates if inflation fails to fall back to target as forecast. NGDP targeting could bring fiscal and monetary policy into closer alignment. As I note in the paper, ‘a shared nominal anchor… would reduce the risk of macroeconomic contradiction’.
This isn’t a silver bullet. It won’t fix the UK’s planning system, address workforce shortages in certain sectors or unlock productivity on its own. But it would create a more stable and predictable macro environment – one in which longer-term reforms have a better chance of succeeding.
Most importantly, this change would be entirely consistent with British monetary history. We’ve changed course before: leaving the gold standard, abandoning Bretton Woods, experimenting with monetary targets and, finally, adopting inflation targeting. Each move reflected the challenges of its time. If the facts have changed – and they clearly have – we should be willing to change again.
The real question isn’t whether inflation targeting has ‘failed’. It’s whether a better alternative now exists. I believe NGDP targeting is that alternative – and it deserves a serious place in the conversation about how we get Britain growing again.
‘Rethinking Monetary Policy: The Case for NGDP Targeting in Britain’ is published by the IEA.
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