Time for re-establishing autonomous control over the Bank of England
The Bank of England, originally granted independence in 1997 with a mandate to maintain price stability through monetary policy, now finds itself tasked with an expansive set of objectives. This shift in focus, from monetary stability to also include prudential oversight, financial stability, and systemic risk management, has sparked a debate about whether the Bank should return to its original remit of price stability and monetary policy.
The Financial Policy Committee (FPC), created after the financial crisis, monitors systemic risk across the economy. The Prudential Regulation Authority (PRA), folded into the Bank of England in 2016, is responsible for supervising banks, insurers, and building societies. The PRA operates alongside the Financial Conduct Authority (FCA), whose head also sits on the FPC.
Monetary policy, once the Bank's sole focus, has become just one responsibility among many. This compromise between the Bank's role and the government's responsibility for wider economic policy has blurred the line between the two. The governor, originally directly responsible for leading the Bank of England and ensuring price stability after its separation from the government in 1997, is no longer held directly responsible for inflation but must juggle multiple, sometimes competing objectives.
The Bank's mandate requires it to pursue price stability "in support of the government's objectives for growth and employment". However, this has led to the Bank being forced to weigh fundamentally political judgements alongside inflation, diluting accountability. The Tax Payers' Alliance suggests that the Bank of England should return to its original remit of monetary policy and price stability.
Last month, the Monetary Policy Committee of the Bank of England announced another interest rate cut. The governor's role is clearly defined as maintaining control of inflation while minimizing unnecessary harm to the wider economy. Yet, the pace of cuts has been a topic of debate, with the Bank's chief economist, Huw Pill, suggesting that the pace may have been too fast.
Inflation remains at 3.8 per cent, almost double the Bank's two per cent target. This high inflation rate is reflected in the 30-year gilt yield, which has risen above 5.6 per cent, close to its highest level since 1998. The current base rate of the Bank of England is four per cent.
The FPC's macro-prudential role should be transferred to ensure systemic risk monitoring is tied to a regulator answerable to the government. The PRA should be separated and made directly accountable to ministers for prudential oversight. These suggestions aim to address the concerns about the Bank's expanded role and its impact on accountability and focus.
The debate about the Bank of England's role continues, with calls for a return to its original focus on price stability and monetary policy. As the Bank navigates these discussions, it will be important to maintain its independence while ensuring accountability and clear objectives.
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