RUTH SUDERLAND: While an independent Bank of England might have some flaws it’s better than the alternatives

  • Debats rage over whether Bank of England was correct to raise interest rates 
  • It hides deeper questions like: Is inflation-targeting the right system? 
  • 1992 saw the introduction of inflation targeting.
  • Bank independence is inextricably tied to the concept of inflation targeting 

There has been much debate about whether or not the Bank of England had the right to increase interest rates. 

But this hides deeper concerns: Is inflation targeting the right policy? Is the Bank keeping its eyes on the ball or are they at risk of getting distracted by issues like climate change and historical connections to slavery trade, as well as the possibility that some staff work from home? 

Inflation-targeting’s existence is directly linked to the Bank’s independence. They are both so well-known that they have become almost second nature, despite being relatively new. 

Questions: Has the Bank got its eye on the ball, or is it at risk of being distracted?

Questions: Is the Bank keeping its eyes on the ball or are they at risk?

The introduction of inflation targeting in 1992 was shortly after the UK exited the European Exchange Rate Mechanism. Inflation targeting was introduced in 1992, shortly after the UK’s exit from the European Exchange Rate Mechanism. It was one of Gordon Brown’s first actions as Labour chancellor. 

Because politicians are too likely to manipulate interest rates and inflate economies, it was thought that they couldn’t trust them with monetary policies. Far better to leave such important matters to a grown-up, in other words, the Governor. 

It is being questioned whether the implicit assumption that central bank giants like Andrew Bailey can navigate crisis situations well is still valid. These seeds of doubt can become an actual danger if they fail to curb inflation. 

It is extraordinary to have given such a large amount of power over to non-elected financial officers. Independence is seen as good because it seems to have succeeded: the Bank, until now, appeared to have squelched inflation. It was a remarkable achievement considering that it peaked at 27% in 1975 and averaged nearly 6 percent per year through the 1980s. 

Low inflation and low interest rate have been our hallmarks since that time. Is it possible for the Bank to take the entire credit or is much of this a happy accident? 

Let’s give Threadneedle Street some credit. However, there are also major anti-inflationary forces that have not been within central bankers’ remit. They include the advancement of technology and lower trade barriers. 

But price stability does not mean that everything is stable.

The credit crisis was caused by the instabilization of the global financial system due to toxic debt.

Yet the Bank of England emerged from that cataclysm even more powerful, gaining control over areas of financial regulation and supervision that had been split with other authorities. Bailey and the other officials deserve our appreciation for the strength of the balance sheets that commercial banks had when they entered the Covid crisis a decade ago. 

There are concerns that the Bank may lose focus of its primary purpose, which is to protect the economy against the effects from pandemic. 

However, there have been sideshows. After deciding to take out oil paintings and busts from former officials connected to the slavery trade, it was accused of “going woke”. 

Mervyn King, the ex-governor of the UK, criticised the government for its role in climate change after the Chancellor expanded its mandate to support net zero. 

Despite the noble causes it champions, there is no way for the Bank to address every social problem. It must remain true to its core mission, which is to protect and control inflation. 

Failure to do so will put the Bank at risk of losing its independence, which would prove dangerous. Although it may not have all the right qualities, an independent Bank is still better than the alternatives.