Bank of England to abandon inflation target - Impact: High

Bank of England to abandon inflation target - Impact: High

The Bank of England is widely expected to abandon its 2% inflation target, which has been in place for more than two decades, as the BoE Governor Mark Carney thinks about alternatives to the measure of price level change. It may be replaced with targets for the unemployment rate gross domestic product or domestically generated inflation, a sign that the BoE is focused more on growth and the labour market. If the bank abandons its inflation target, it may face long-term credibility issues, while the next monetary policy meeting is set on February 7, where Carney will talk about his plans for the U.K. The inflation in the U.K. held steady at 2.7% in the year to November, as lower fuel prices helped offset higher costs for food and beverages.

"The switch of target might not persuade firms and households to spend more if they did not understand what the Bank was trying to achieve," Vicky Redwood, chief U.K. economist at Capital Economics, pointed out.

"I know Mark very, very well. He's a very good professional and friend. I am sure he will have a hook up with all the issues that any central banker has to cope with so I have no advice to give and I am sure he will do the job very well," said Jean-Claude Trichet, the former head of the European Central Bank.