Mike Newton is a markets consultant. He previously worked for the Bank of England and in the financial markets.
“You have one job in my world,” a very senior central banker said to me recently, nursing a pint of Brains on one of his occasional visits to Britain, “and that is to control inflation. Nothing else matters.”
No-one could reasonably dispute that the Bank of England has failed to do this ‘one job’. The time has come to have an open discussion about reform, in which no options are off the table, including greater political control.
It has missed its inflation target repeatedly. Consumer prices are now falling but are still four times higher than target. While factors like energy prices have been headwinds, it has not acted decisively or early enough.
Its erratic communication has not reassured. There has also been mandate drift, with focus on environmental, social, and corporate governance (ESG), income equality and other woke issues, at the cost of the mission.
Our institutions generally have a history of masterful inertia, but in a genuine emergency they seem to have an almost mystical ability to deliver extraordinary results. It is worrying that the Bank has not been able to do this.
Its recent history has been defined by a failure to think critically and act flexibly on major issues, and its technical record on essentials such as forecasting has been demonstrably poor, even allowing for the wide dispersions forecasting usually involves.
I am reminded of the former England cricket captain, Mike Brearley, who in his book On Form talks about the importance of believing the evidence of one’s own eyes. Money was being printed and handed out like there was no tomorrow, jobs were plentiful and asset prices were rising sharply. Huge inflation surely lay ahead yet the Bank could not see it.
But that is not the end of it. For us as Conservatives, the political cost has been huge.
The Bank has been allowed to operate as an independent technocratic arm of the state, remote from political supervision in a way not dissimilar to the BBC or Church of England. Whenever a government chooses to subcontract the key lever of political power, its control over the economy, to technocrats, it runs the risk that the subcontractor will not deliver.
The voters, rightly uninterested in nuance, blame who they perceive is responsible for their standard of living, and vote accordingly. They might feel grumpy about Andrew Bailey, but it will be Rishi Sunak who they vote against.
The current Bank of England framework is Labour legislation dating from 1998, introduced to remove the risk premium from government borrowing. The markets did not trust Labour and so, to shore up the public finances, Gordon Brown effectively decided to let the Bank set the price of money to ‘keep us safe from the politicians’.
This worked well at a time when the UK economy saw huge disinflationary tailwinds. These included: energy, the digital revolution, mass immigration, booming Asian imports, and the Peace Dividend. And iron-tough governors Eddie George and Mervyn King ensured no slippage.
There are a number of reform options for what now looks a tired set of arrangements. The argument that limpet-like adhesion to the status quo is necessary to keep borrowing costs down simply does not withstand scrutiny when one looks at the recent moves in gilts.
Credibility is key. The Federal Reserve did not have an inflation target until 2012, and it remains very nebulous what the actual definition of it is, which allows it some flexibility to deal with big shocks. However, this is only possible because of the credibility chairmen such as Volcker and Greenspan built up.
As globalisation reverses and shocks increase, it may well be that asking the Bank to hit an inflation target number that was picked in 1998 is unreasonable. But without credibility you cannot have that flexibility, otherwise the markets will deliver a punishment way beyond anything we have seen so far.
Credibility only comes when you get the big calls right, and that needs the right people and processes. We are now learning this the hard way.
Taking rate-setting back in-house would be a step too far, but the principal of greater political accountability is right, and consistent with what happens in other government departments, where operational matters are devolved, but not ‘do not touch’ as is the case with monetary policy. We need to have the confidence to be more involved in technical decisions, particularly given the expertise to be found on our benches.
When technocracy has the upper hand, Parliament abrogates control and ministers lose the ‘feel’ that comes from operations. This also happened in health and education, producing similarly unpromising results for party and country.
Only with monetary policy is political involvement heretical, which cannot be right. It is a demanding and consequential discipline, but no more so than running a national cardiological or early-years education strategy.
There are several steps possible without legislation, starting with the Bank and its culture. It needs new modelling technology, and to reboot intelligence gathering outside of London.
The ‘Ken and Eddie Show’ Chancellor-Governor meetings, introduced in 1992, were introduced after an equally colossal policy failure – ERM exit. These meeting were highly effective in creating confidence and political balance, and only lampooned many years later.
A modern iteration would see them restored before each rate-setting meeting, with a press conference afterwards. The Bank would retain full control of rates.
The Bank of England Act provides plenty of opportunities for the Treasury to play a more active role in directing policy, in particular the selection of Monetary Policy Committee members. A critical first step would be a reboot and reorganisation of the MPC, with greater scrutiny of appointees, with shorter terms.
Finally, Labour will have observed the political damage of the Bank’s super-error to the Tories. It must be thinking that if it does get into government after 14 years of opposition, it will not want to subcontract its political fortunes to the Bank.
Reeves could strike pre-emptively by announcing a review now and let any sell-off in gilts occur on our watch. We need to be careful we are not outflanked on this issue.
Mike Newton is a markets consultant. He previously worked for the Bank of England and in the financial markets.
“You have one job in my world,” a very senior central banker said to me recently, nursing a pint of Brains on one of his occasional visits to Britain, “and that is to control inflation. Nothing else matters.”
No-one could reasonably dispute that the Bank of England has failed to do this ‘one job’. The time has come to have an open discussion about reform, in which no options are off the table, including greater political control.
It has missed its inflation target repeatedly. Consumer prices are now falling but are still four times higher than target. While factors like energy prices have been headwinds, it has not acted decisively or early enough.
Its erratic communication has not reassured. There has also been mandate drift, with focus on environmental, social, and corporate governance (ESG), income equality and other woke issues, at the cost of the mission.
Our institutions generally have a history of masterful inertia, but in a genuine emergency they seem to have an almost mystical ability to deliver extraordinary results. It is worrying that the Bank has not been able to do this.
Its recent history has been defined by a failure to think critically and act flexibly on major issues, and its technical record on essentials such as forecasting has been demonstrably poor, even allowing for the wide dispersions forecasting usually involves.
I am reminded of the former England cricket captain, Mike Brearley, who in his book On Form talks about the importance of believing the evidence of one’s own eyes. Money was being printed and handed out like there was no tomorrow, jobs were plentiful and asset prices were rising sharply. Huge inflation surely lay ahead yet the Bank could not see it.
But that is not the end of it. For us as Conservatives, the political cost has been huge.
The Bank has been allowed to operate as an independent technocratic arm of the state, remote from political supervision in a way not dissimilar to the BBC or Church of England. Whenever a government chooses to subcontract the key lever of political power, its control over the economy, to technocrats, it runs the risk that the subcontractor will not deliver.
The voters, rightly uninterested in nuance, blame who they perceive is responsible for their standard of living, and vote accordingly. They might feel grumpy about Andrew Bailey, but it will be Rishi Sunak who they vote against.
The current Bank of England framework is Labour legislation dating from 1998, introduced to remove the risk premium from government borrowing. The markets did not trust Labour and so, to shore up the public finances, Gordon Brown effectively decided to let the Bank set the price of money to ‘keep us safe from the politicians’.
This worked well at a time when the UK economy saw huge disinflationary tailwinds. These included: energy, the digital revolution, mass immigration, booming Asian imports, and the Peace Dividend. And iron-tough governors Eddie George and Mervyn King ensured no slippage.
There are a number of reform options for what now looks a tired set of arrangements. The argument that limpet-like adhesion to the status quo is necessary to keep borrowing costs down simply does not withstand scrutiny when one looks at the recent moves in gilts.
Credibility is key. The Federal Reserve did not have an inflation target until 2012, and it remains very nebulous what the actual definition of it is, which allows it some flexibility to deal with big shocks. However, this is only possible because of the credibility chairmen such as Volcker and Greenspan built up.
As globalisation reverses and shocks increase, it may well be that asking the Bank to hit an inflation target number that was picked in 1998 is unreasonable. But without credibility you cannot have that flexibility, otherwise the markets will deliver a punishment way beyond anything we have seen so far.
Credibility only comes when you get the big calls right, and that needs the right people and processes. We are now learning this the hard way.
Taking rate-setting back in-house would be a step too far, but the principal of greater political accountability is right, and consistent with what happens in other government departments, where operational matters are devolved, but not ‘do not touch’ as is the case with monetary policy. We need to have the confidence to be more involved in technical decisions, particularly given the expertise to be found on our benches.
When technocracy has the upper hand, Parliament abrogates control and ministers lose the ‘feel’ that comes from operations. This also happened in health and education, producing similarly unpromising results for party and country.
Only with monetary policy is political involvement heretical, which cannot be right. It is a demanding and consequential discipline, but no more so than running a national cardiological or early-years education strategy.
There are several steps possible without legislation, starting with the Bank and its culture. It needs new modelling technology, and to reboot intelligence gathering outside of London.
The ‘Ken and Eddie Show’ Chancellor-Governor meetings, introduced in 1992, were introduced after an equally colossal policy failure – ERM exit. These meeting were highly effective in creating confidence and political balance, and only lampooned many years later.
A modern iteration would see them restored before each rate-setting meeting, with a press conference afterwards. The Bank would retain full control of rates.
The Bank of England Act provides plenty of opportunities for the Treasury to play a more active role in directing policy, in particular the selection of Monetary Policy Committee members. A critical first step would be a reboot and reorganisation of the MPC, with greater scrutiny of appointees, with shorter terms.
Finally, Labour will have observed the political damage of the Bank’s super-error to the Tories. It must be thinking that if it does get into government after 14 years of opposition, it will not want to subcontract its political fortunes to the Bank.
Reeves could strike pre-emptively by announcing a review now and let any sell-off in gilts occur on our watch. We need to be careful we are not outflanked on this issue.