Changing the remit of the Bank of England's Monetary Policy Committee to target asset bubbles as well as inflation would be a mistake, Chancellor George Osborne said on Tuesday.
I don't want to give the MPC lots of different tasks because then it might achieve none of them, Osborne said during a parliamentary hearing on new legislation that will make the central bank the main financial regulator.
He warned against changing the committee's inflation-fighting mandate, especially now when inflation is running at more than double the Bank's 2 percent target.
At a time like this, when there are concerns about inflation, frankly, to go in and change our monetary policy arrangements, change our inflation target, I think would be quite a dangerous thing. We have to convince the world that we are serious about dealing with inflation.
Under rules proposed by the government, the Bank will have far-reaching new responsibilities, including oversight over banks and macro-prudential tools to take action in time to shield the financial system from another major crisis.
The Bank will get two new divisions: the Financial Policy Committee, which will ensure financial stability by monitoring broader risks in financial markets, and the Prudential Regulation Authority, which will make sure banks hold enough capital and liquidity to withstand shocks unaided.
We've created in the same institution a body that is targeting inflation, a body that is looking at systemic financial risks and a body that is prudentially regulating individual firms, Osborne said.
Putting them all in the same institution does allow a bit of sharing of knowledge.
Osborne defended the decision to give regulators more freedom of judgement.
The old checklist approach had failed to prevent banks from running into trouble during the financial crisis even when they were complying with the rules, Osborne said.
Bank governor Mervyn King made a similar point in testimony to the committee two weeks ago, urging lawmakers to give regulators the powers to force banks to implement reforms even if they comply with the letter of regulations.
(Reporting by Sven Egenter and Olesya Dmitracova; Editing by John Stonestreet)