There is a view that governments fiddle with central bank independence at their own risk. But with the current disruption on financial markets looking perilous, maybe it is time for a rethink.
What if the central bank itself is the cause of the instability and the institution admits that it has ‘big lessons to learn’ and its forecasting model is misfiring? The Bank of England has confessed to both.
The volatility in the gilts market, raising the cost of home ownership, is the result of a failure by Bank governor Andrew Bailey and the interest rate setting Monetary Policy Committee to get a grip on inflation.
Governor of the Bank of England Andrew Bailey tenure will last for another five years
When a Tory government feels the need to reach back to Ted Heath, the 1970s and a ‘voluntary’ prices policy on food essentials, one knows something serious is going on.
It is equally worrying when the Bank’s chief economist Huw Pill, an experienced monetary official, says the Bank’s forecasting model isn’t working. That is not a surprise.
One doesn’t have to be a sage to recognise that the Bank’s projections have been wayward. As recently as November it was predicting the longest recession in UK history and we are still waiting.
Failure to lower core prices and get anywhere close to the 2pc inflation target is negligent. Among the questions I am often asked is why can’t Bailey be removed from office.
After all, CEOs are replaced with careless abandon. The answer is that monetary policy is a long run exercise which is why Bailey, three years into his current term, has another five years to serve.
Nevertheless, there are historical precedents for changing the captain.
Faced with rampant inflation and a tumbling dollar in July 1979, then President Jimmy Carter convened his Cabinet, moved Federal Reserve chairman G William Miller to the US Treasury and appointed Paul Volcker to the Fed. The rest is history.
Such drastic action could be counter-productive at present but there may be an alternative route to change.
Bailey, as governor, takes all of the heat and leads the nine person Monetary Policy Committee. What is evident from the decisions on quantitative easing and interest rates is the degree of group think.
As rates have been lifted to the current 4.5pc, dissent largely has been confined to external members. It isn’t surprising. The core of the MPC is made of Treasury retreads.
The last insider to show any dissent was Andy Haldane who voted against the final dose of quantitative easing and warned of the inflation genie when Bailey was delivering speeches insisting inflation was ‘transitory’.
Shaking up the MPC would be a good place to start with reform. Haldane should be installed as deputy governor with a view to taking over from Bailey.
Other strong outside voices should be persuaded it is their public duty to serve. Fresh faces and alternative views, reaching beyond Treasury consensus, are required.
The independent Bank of England was the finest invention of the last Labour government, which wanted the Bank to be as respected an economic institution as the German Bundesbank (before it was depleted by the European Central Bank).
Without a fresh sense of ambition and creative thinking the Bank’s independence is at acute risk.
