The Bank of England: A case for reform
Fifteen years ago, in May 1997, Tony Blair’s new government granted the Bank of England its independence. Since then its fortunes have been mixed.
A brief history of the Bank of England since it was granted independence in May 1997 shows six years of blameless, benevolent rule under Eddie George, until Mervyn King’s accession as governor in 2003.
Against a picture of economic prosperity, King modernised the Bank, but in pursuit of a purist, economics-led vision and at the expense of the Bank’s financial stability mandate. Since mid-2007, the avoidable tragedy of Northern Rock and the ensuing credit crisis, the Bank has struggled to maintain its dignity, let alone its reputation for economic probity.
On paper, it has carried out its responsibilities to the letter. The Monetary Policy Committee (MPC), despite some disagreements and bad blood, has dutifully met every month. The Bank’s many hundreds of economists have delivered its Inflation Report, its quarterly bulletins and working papers.
And the governor’s executive team has excelled itself in speechmaking, conscientiously attending the UK Parliament’s Treasury Committee hearings and, if not quite embracing Twitter and Facebook, at least becoming more accessible to the Bank’s ultimate owner, the British public.
In practice, however, the Bank has lost a great deal of credibility. Price stability, the Bank’s holy grail, has proved elusive. In 1997, its mandate was to keep inflation at 2.5% (revised to 2% in Dec 2003). In the past five years, it has twice breached 5% (Sept 2008 and Sept 2011) and fallen as low as 1.1% (Sept 2009). It currently stands at 3.5% (Mar 2012).
The governor, who is required to write a letter to the UK chancellor if the inflation target is missed – either up or down by 1% – must be running out of writing paper. The Bank’s forecasting record has become increasingly patchy, to say the least.
Other, more subtle aspects of the Bank’s work need to be considered. As Brian Hilliard, chief economist of Société Générale, pointed out to the Treasury Committee recently, the lines between monetary policy (the Bank’s domain) and fiscal policy (the Treasury’s) have become ‘blurred’. With interest rates at the so-called ‘zero-bound’ since early 2009, the Bank has fallen back on an as yet unproven monetary policy tool, in the form of Quantitative Easing (QE).
Its continued use of what was designed as an emergency facility has now made QE something of a conventional, rather than an ‘unconventional’ measure. Its explicitly stated use as a method of avoiding undershooting the inflation target is hard to square with the current trend of rising prices.