RUTH SUNDERLAND: Bank of England independence is not perfect, but still better than the alternative of letting ministers pull the levers
Bank of England governor Andrew Bailey’s admission to MPs that he feels ‘helpless’ to combat the cost-of-living crisis was shocking, considering his predecessors had only to raise an eyebrow to impose their will.
But the return of inflation casts a cloud, not only over his leadership, but that of the Bank of England’s independent status.
An independent Bank should be an important safeguard for us all, against politicians manipulating monetary policy to their own ends by engineering a boom ahead of an election, only to be followed by a bust.
Concern: Bank of England governor Andrew Bailey’s admission to MPs that he feels ‘helpless’ to combat the cost-of-living crisis was shocking
But independence only works when there is faith in the Bank. This is why Bailey’s evisceration is so serious. A Governor’s leadership in a crisis can be a major determinant of the outcome.
Bailey should have stamped his authority on the situation by raising rates sooner. Bold action could have established him as a tough, uncompromising inflation-fighter. Instead, he vacillated, communicating poorly and wrong-footing the markets with mixed messages about interest rates.
Had he shown greater resolve, it might even have offset some of the pressure on sterling, which has fallen sharply against the dollar. A weak pound is an added inflationary risk, because the UK economy is very reliant on imports.
There are, as he says, factors beyond his control. Bailey cannot tame world energy markets, free up container ships marooned in Chinese ports, or halt Putin’s incursion into Ukraine. Inflation is a global problem. Central bankers collectively came to the wrong conclusion that it was transitory. But there was no shortage of warnings from the Bank’s former chief economist and external experts. Bailey chose not to listen.
Calling for the Governor’s head is not a realistic option. To defenestrate him would cause a widespread loss of confidence in the UK on the international markets.
It would also act as a deterrent to high quality candidates in future.
Bailey was installed as the pandemic broke, in uniquely difficult conditions. He has six years left of his eight-year term. There is time to redeem himself.
This situation raises questions about what happens when the Bank and its governor fall short. The risk is that politicians, exasperated with the inability to end the cost of living crisis, will want to take back control.
Independence, granted in 1997, goes hand in hand with inflation-targeting, introduced five years earlier. Until recently, both have been deemed a success.
How much of that was down to the Bank of England, and how much a happy coincidence of anti-inflationary trends including technology, the rise of the internet, the lowering of trade barriers and cheap energy, is up for debate.
Ominously, the last two of these are in reverse. Inflation-targeting may have had its day as a framework. Keeping a rein on consumer price rises is important, but it is only one measure.
The past three decades have seen low interest rates and low inflation, but the regime did not prevent toxic debt leading to the financial crisis, nor did it stop rampant asset price rises which have led to greater wealth inequality. Monetary policy frameworks should not be set in stone, but evolve as economies change.
As for central bank independence, it is not perfect, but still better than the alternative of letting ministers pull the levers. Perhaps it would be fine under an astute Conservative chancellor, but imagine what would happen with a Corbynite in No 11.