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monetary policy

Britain's Chancellor of the Exchequer, George Osborne, holds up his budget case for the cameras as he stands outside number 11 Downing Street, before delivering his budget to the House of Commons, in central London March 20, 2013.STEFAN WERMUTH/Reuters

When Mark Carney takes over as governor of the Bank of England in July, he'll have more powers than even he expected.

Until now the Bank had a fairly narrow mandate: keep inflation at 2 per cent and support the government's overall economic objectives.

That left little room to manoeuvre, although despite higher inflation in recent years the central bank has responded by cutting its key lending rate to 0.5 per cent and buying back about $580-billion worth of government bonds through a program known as quantitative easing.

During his budget address Wednesday, Chancellor of the Exchequer (finance minister) George Osborne unveiled changes to the Bank's mandate that will give it flexibility to go even further.

The Bank's nine-member Monetary Policy Committee, which is chaired by the governor, will now be able to use a variety of tools, or "unconventional instruments," to meet the inflation target so long as it indicates how quickly it intends to get inflation back on target.

The Bank will also be able to issue "forward guidance" in order to "influence expectations," something the U.S. Federal Reserve has done repeatedly in outlining how long U.S. interest rates will remain low while unemployment remains high.

"This [guidance] can help the economy because it gives families planning their futures, and businesses wondering whether to invest, more confidence that interest rates will stay lower for longer," Mr. Osborne said in his budget speech.

He added that Mr. Carney, who heads the Bank of Canada, has been briefed on the changes to the mandate and supports them.

More changes to the Bank's mandate could be coming.

As part of his budget, Mr. Osborne released a 68-page review of Britain's monetary policy framework. "Monetary policy has been forced to move beyond conventional instruments in order to support economies through exceptional challenges," the review said. "Different central banks have used a range of unconventional instruments in order to deliver further policy easing. This provides a broad range of interventions against which to consider the operation of monetary policy in the U.K."

The changes to the remit won general applause from economists, although many expected the government to go much further. "At present, the Bank of England tells us each month what interest rates will be for the next few weeks, never giving a clue as to what it is thinking of doing over the longer term. But it will now be given scope to behave more like the U.S. Federal Reserve," said a report from Royal Bank of Scotland. "The idea is that this forward guidance will convince people and businesses that interest rates will stay low for a long time, giving them incentives to borrow and spend."

As for the budget over all, Mr. Osborne stuck largely to his theme of austerity, announcing nearly $4-billion in spending cuts and offering a bleak outlook for the economy. "This is a budget for people who realize there are no easy answers to problems built up over many years," he said. "Just the painstaking work of putting right what went so badly wrong."

Britain's economy shrank by 0.3 per cent in the fourth-quarter of 2012 and could slip again in the first three months of this year, meaning the country would be technically in a recession for the third time in five years. The economy is expected to grow by just 0.6 per cent this year, Mr. Osborne said, lower than the government forecast in December. Britain has also lost its triple-A credit rating and the number of unemployed jumped by 7,000 between November and January, putting the unemployment rate at 7.8 per cent. As Mr. Osborne delivered his speech, public servants staged a walkout in protest over the austerity measures.