The Bank of England was given operational independence over monetary policy by the then Labour government in May 1997. (The decision came into force on 1 June 1998.)
The debate around whether it is right, particularly in a democratic system, for a central bank to have operational independence over monetary policy is now starting to hot up [see, for example, William Allen in Financial World Aug/Sept 2017]. This is as people start to examine, among other things, some of the distributional effects of the quantitative easing that many central banks, including the Bank of England, introduced after the financial crisis, at the same time as there is concern about the growth of extreme political movements.
“Bank of England independence was not inevitable,” said Gordon Brown (who was chancellor of the Exchequer when the Bank was made independent), speaking at a Bank of England conference on 28 September, to mark the 20th anniversary.“In a democratic system, you have got to get the right balance.”
Brown noted that, as Prime Minister, Margaret Thatcher had opposed Bank independence. “Major, too, wouldn’t listen to Lamont [then Chancellor]” and the Labour party throughout history has been “violently opposed” to the idea.
If Brown’s comments reflect the current debate in policy circles, the pendulum may have swung back from support for operational independence.
“It is wrong not have a joint Bank of England/Treasury oversight group,” said Brown during his speech, adding that some of the highly political issues impacted by monetary policy include the development of the UK housing market and the distributional consequences of quantitative easing (which has pushed up asset prices at the same time as savers and those with limited capital have seen their positions weaken.) “The real world, when a crisis comes, is that the Bank and the Treasury have got to work together...[and] there should be a formal group that has oversight.” He added: “nothing I have said takes away from the success of independence.”
Another speaker at the conference, Prof Charles Goodhart, spoke more plainly about what he sees as the likely future for the Bank. He believes that “politicians and the Treasury will win. Central bank independence was nice while it lasted”.
Andrew Tyrie, former chairman of the Treasury select committee, said at the same event that he was “convinced” that central bank independence should be maintained, but that it could be “vulnerable”. One of the reasons for this, he argued, was that central banks “can easily be caricatured as ivory towers” at a time when there is a lack of trust in institutions.
That it “can be difficult” to explain to the general public what a technocratic institution like the Bank of England does, but that it is important to help voters see that “it is doing the right thing” even when its decisions might not be politically popular, was pointed out by DeAnne Julius, a former member of the monetary policy committee. How this disconnect is a central problem for any democratic system was discussed in detail by Stanley Fischer, the economist, in another session.
How we got here
The decision to give operational independence over monetary policy to the Bank of England was, in major part, the result of concern about the short-term politicisation of long-term economic decisions, particularly ensuring price stability.
“High levels of growth and employment...are not possible unless you avoid taking economic decisions for political reasons….we were putting Britain on a long-term path,” said Brown at the conference. However, it may not have been an accident that it was a Labour government that took the final step.
“The [labour government of the day] decided to go for independence at least in part because it wanted to look credible economically,” said DeAnne Julius.
Brown argued that the stable economic regime seen in Britain after the Bank became independent “changed the debate about joining the Euro. Independence...was not just a technical success, it avoided many problems that might have pushed us into the Euro,” said Brown.
A number of speakers pointed out that, since the independence of the Bank, inflation in the UK has been low and stable (though there is a debate on whether all of the credit is due to the Bank). “It was a benign world, an anti-inflationary environment...but delivery of the inflation target is of immense credit,” said Brown.
For more details of the debate on Bank independence, please see the paper given by Ricardo Reis, of the LSE, at the event.
Ouida Taaffe is the Editor for the official journal for The London Institute of Banking & Finance, Financial World.