Fifteen years ago to the week, in May 1997, the thumping strains of D:Ream’s Things Can Only Get Better heralded the arrival of Tony Blair, Gordon Brown and New Labour.
The music was still ringing in the new Chancellor’s ears as he gave the Bank of England its independence. The Bank seized its opportunity – to direct monetary policy without fear or favour – with both hands.
Fifteen years on, in May 2012, you might say, there is no need to change the record. But how has the Bank of England fared?
The briefest potted history since 1997 shows five years of blameless, benevolent rule under Eddie George until Mervyn King’s accession 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.
And 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, 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 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 2.0% in Dec 2003). In the last five years, it has twice breached 5.0% (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 Chancellor if the inflation target is missed, either up or down, by 1.0%, 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 Dr Brian Hilliard, chief economist of Societe Generale, 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. 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.
So far, the alchemy of QE has moved a third of Britain’s national debt onto the Bank’s balance sheet. We have yet to hear any convincing argument as to its beneficial effects. The extent of the lack of coordination between the Bank and the Debt Management Office, guardian of the gilts market, remains something for a proper inquiry.
As it is, the Bank’s relations with the Treasury Committee, the only forum in which it is accountable, are at rock bottom. The Committee’s repeated requests for the Bank to hold an inquiry into its performance during the financial crisis have been met with stubborn refusals. It is hardly surprising that the Committee wants a veto over the choice of the next Governor.
One might speculate on the Bank’s next fifteen years. It will certainly become unrecognisable from the institution we have today. The next Governor will find himself having to rebuild the Bank’s flagging morale, defending it against charges of being an ‘over-mighty citizen’ and restoring its standing.
Looking ahead to 2027 (the 333rd anniversary of its founding) the Bank will have said goodbye to that next Governor; his successor (my money is on Spencer Dale, 45, the Bank’s chief economist) will be nearing the end of his or her eight-year term. At least two general elections will have been held and two new administrations formed: Scotland may have its independence; the Eurozone may be a distant memory.
A future Chancellor – rising stars such as the Conservatives’ Matthew Hancock MP or Labour’s Chuka Umunna MP spring to mind – may, in 2027, decide that the Bank’s weighty new powers should be curtailed, that it should be broken up again or its independence abolished altogether. More likely, with much protestation from its old guard, it will have been consummately remoulded as a modern, market-facing central bank. Many would say that should have happened in 2003 or 2008; at any rate, is now long overdue.
Dan Conaghan is the author of ‘The Bank – Inside the Bank of England’, published by Biteback Publishing.
