RUTH SUNDERLAND: An independent Bank of England may have its flaws, but it is better than the alternative
- Debate has raged over whether Bank of England was right to raise interest rates
- This masks deeper questions: is inflation-targeting the right regime?
- Inflation targeting was introduced in 1992
- Concept of inflation-targeting inextricably linked with Bank’s independence
Debate has raged over whether the Bank of England was right to raise interest rates.
This masks deeper questions: is inflation-targeting the right regime? And has the Bank got its eye on the ball, or is it at risk of being distracted by climate change, rows over historical links to the slave trade and even by the fact that many staff are working from home?
The concept of inflation-targeting is inextricably linked with the Bank’s independence. Both are now so familiar they are taken for granted, though in fact they are relatively recent.
Questions: Has the Bank got its eye on the ball, or is it at risk of being distracted?
Inflation targeting was introduced in 1992, shortly after the UK’s exit from the European Exchange Rate Mechanism. Independence came in 1997, as one of the first acts of Labour chancellor Gordon Brown.
The thinking was that politicians could not be trusted with monetary policy, because they would be too tempted to inflate the economy and muck about with interest rates for electoral purposes. Far better to leave such important matters to a grown-up, in other words, the Governor.
The implicit presumption that the big beasts of central banking, including current governor Andrew Bailey, can be trusted to navigate crises, is coming under scrutiny. If the Bank fails to stop inflation, those seeds of doubt risk turning into real jeopardy.
To have handed over such an enormous amount of power to unelected financial officials is, when one thinks about it, extraordinary. Independence is seen as good because it seems to have succeeded: the Bank, until now, appeared to have squelched inflation. No mean achievement, considering it had peaked at 27 per cent in 1975, and ran at an average of nearly 6 per cent a year in the 1980s.
Since then, we have enjoyed low inflation and low interest rates. But can the Bank really take all the credit, or has much of it been a happy coincidence?
Let’s concede some of the plaudits to Threadneedle Street. But there have also been some major anti-inflationary forces outside central bankers’ remit, including the advance of technology, lower barriers to trade and increased global competition.
And price stability isn’t everything.
As we now know, the global financial system had become unstable due to the build-up of toxic debt, which central bankers failed to prevent and which led to the credit crisis.
Yet the Bank of England emerged from that cataclysm even more powerful, gaining control over areas of financial regulation and supervision that had been split with other authorities. Bailey and other officials deserve our gratitude for the fact the commercial banks entered the Covid crisis with their balance sheets in much stronger shape than they were a dozen years ago.
But there are worries that the Bank is straying away from its core purpose when it needs a laser focus on protecting the economy from the effects of the pandemic.
There have, however, been sideshows. It has been accused of ‘going woke’ after deciding to remove oil paintings and busts of former officials linked to the slave trade.
Ex-governor Mervyn King criticised its involvement in climate change, after the Chancellor changed its mandate to include supporting the change to net zero.
However worthy these causes, the Bank cannot be expected to solve every social problem. It should stick to its main job: to promote the good of the people of the United Kingdom by controlling inflation and keeping the financial system safe.
If it fails in that, independence will come under threat, and that would be dangerous. An independent Bank may have its flaws, but it is better than the alternative.