Bank of England Faces Calls for Reform and Increased Political Accountability over Failure to Control Inflation
The Bank of England is under scrutiny as it faces mounting criticism over its failure to effectively control inflation. This has sparked calls for reform and greater political accountability within the institution. The central bank, which is responsible for maintaining price stability, has repeatedly missed its inflation target, with consumer prices still four times higher than the desired level, despite the recent downturn. Experts argue that the Bank’s lack of decisive action and its focus on other issues, such as environmental and social concerns, have hindered its ability to fulfill its primary objective.
Critics point to the Bank’s erratic communication and mandate drift as further evidence of its shortcomings. While institutions often demonstrate inertia, they are expected to deliver results in times of crisis. Unfortunately, the Bank of England has failed to do so, leading to concerns about its management and forecasting abilities. Former Bank employees, like markets consultant Mike Newton, suggest that the institution has been unable to recognize the signs of impending inflation, despite the obvious indicators such as increased money printing, job availability, and rising asset prices.
The failure of the Bank of England to effectively control inflation has not only led to economic consequences but also political ones. As an independent technocratic arm of the state, the Bank operates remotely from political supervision, similar to institutions like the BBC or Church of England. This lack of direct political control has left the government vulnerable to public backlash. When the public perceives a decline in their standard of living, the blame typically falls on those in power. In this case, it is the government, particularly Chancellor Rishi Sunak, who may face the consequences rather than the Bank of England itself.
The current framework of the Bank of England was established by Labour legislation in 1998, intending to remove the risk premium from government borrowing and bolster public finances. However, experts argue that this framework, which allowed the Bank of England to set the price of money independently, is outdated and in need of reform. The argument that maintaining the status quo is necessary to keep borrowing costs down is debunked by recent movements in gilts. Credibility is crucial for effective policy-making, and the Bank needs to regain credibility through getting the big decisions right.
While bringing rate-setting back under political control may be deemed excessive, there is a call for greater political accountability within the Bank of England. Other government departments involve politicians in technical decision-making processes, and it is believed that monetary policy should not be an exception. Suggestions for reform include allowing the Treasury to have a more active role in policy direction, particularly in the selection of Monetary Policy Committee members. This could involve shortened terms and increased scrutiny during the appointment process.
The Labour Party, having observed the political damage suffered by the Conservative Party due to the Bank of England’s failures, may be considering a preemptive review of the Bank in the event they come into power. By taking action now and initiating a review, they aim to address potential issues and mitigate any negative repercussions that could impact their political fortunes.
Multiple steps can be taken without parliamentary legislation, including cultural reforms within the Bank and an upgrade of its modelling technology. Additionally, restoring the Chancellor-Governor meetings, which played a crucial role in boosting confidence and maintaining political balance, could help improve the Bank’s decision-making processes. The Bank of England Act provides opportunities for the Treasury to have a more active role in policy direction, suggesting a reboot and reorganization of the Monetary Policy Committee.
The Bank of England’s failure to effectively control inflation has raised concerns about its capability and necessitates a review of its operations and structure. By addressing the issues at hand and implementing appropriate reforms, the Bank can regain credibility and strengthen its ability to respond to economic challenges effectively. Increased political accountability can ensure that decisions are made with a broader perspective and mitigate the negative political ramifications caused by economic downturns. As the debate surrounding the Bank of England’s role continues, reform appears to be a necessary step towards achieving better outcomes for the economy and the public.
