Chancellor George Osborne will change the remit of the monetary policy committee to target more than just inflation when setting interest rates.
In his Budget this week, Osborne said the MPC will continue to target the consumer prices index at 2 per cent over 12 months but will also consider other factors when setting rates.
Osborne said: “As we have seen over the last five years, low and stable inflation is a necessary but not sufficient condition for prosperity.
“The new remit explicitly tasks the MPC with setting out clearly the trade-offs it has made in deciding how long it will be before inflation returns to target.”
It is similar to the dual mandate system operated by the US Federal Reserve, where rate-setters consider the impact on unemployment as well as inflation.
Osborne said both Bank of England governor Sir Mervyn King and incoming governor Carney have agreed to the new remit.
The MPC will also be given powers to use unconventional tools to boost the economy while keeping inflation stable, including the power to set interest rates for the longer term.
Osborne said: “This 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.”
Carney will report back on whether to adopt long-term interest rate setting in his first inflation report in August.
Mortgage industry consultant Mehrdad Yousefi says: “This new remit should stop the MPC having knee-jerk reactions and putting interest rates up sharply.
“It will have a positive impact on the mortgage market for years to come as there will be less extreme movements in rates.”