Et vos, Brutes? The PM and the Chancellor try to nudge the MPC

The following items appeared on the Reuters screen earlier today (January 8, 2008): • 12:09 08Jan2008 RTRS-UK’S BROWN SAYS BY THE END OF THE YEAR BELIEVES INFLATION WILL BE AROUND 2 PCT • 12:31 08Jan2008 RTRS-UK’S DARLING SAYS WILL DECIDE ON REAPPOINTMENT OF BOE GOVERNOR IN NEXT FEW WEEKS • 12:35 08Jan2008 RTRS-UK’S DARLING SAYS POSITION OF STABILITY IN ECONOMY HAS GIVEN BOE MPC ROOM FOR MANOEUVRE I could not believe my eyes. Are they mad or are the Prime Minister and the Chancellor of the Exchequer really trying to nobble the Monetary Policy Committee of the Bank of England through coordinated messages at a joint press conference, two days before a rate setting meeting of the MPC?. Just to be sure I went to the full quotes. Here they are: Brown: “At the end of last year inflation had gone to 2.1 percent: there’ll be utility price rises which will affect it in the next month or two but by the end of the year we believe inflation will be about 2 percent in Britain. To maintain that low inflation environment benefits everybody.” Darling: “In relation to the appointment of the governor of the Bank of England, that is something we will decide in the course of the next few weeks.” Darling: “If you look at the BoE minutes, they take into account everything that could affect prices but given where we are in the economy and the reduction in inflationary pressures, they believe they have got the room to make reductions (in interest rates). It’s up to the MPC to decide what is appropriate. But we are in a position given the stability of the economy that the MPC has a room for maneuver that was not available 10-15 years ago.” And there we have it. A joint press conference by the PM and the Chancellor two days before an MPC meeting. First the PM tells us inflation will be 2 percent at the end of the year. Then the Chancellor reminds us that he will make a decision during the next few weeks on whether or not to reappoint the Governor of the Bank of England. Finally the Chancellor points to the Bank of England minutes, refers to “…the reduction in inflationary pressures,…” and concludes that the MPC have got the room to make reductions (in interest rates). To make sure the point is not misunderstood he then asserts the MPC has “room for manoeuvre”. The Chancellor generously concedes that “It’s up to the MPC to decide what is appropriate”. This reminds me of a story, no doubt apocryphal, about the award of the Nobel prize in economics (strictly the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel) to Gunnar Myrdal. At the time (1974), Myrdal was a member of the committee of the Royal Swedish Academy of Sciences deciding the award. According to the story, he got up at some point during the meeting, disqualified himself and said “Gentlemen, I will leave now. You will know what to do” – or words to that effect. The committee went on to award the Nobel prize jointly to Myrdal and Friedrich von Hayek. Unlike the Nobel committee which, regardless of whether the story is true, obviously did not know what it was doing when it awarded the Nobel prize to Myrdal, the MPC does know what to do. And that is to reject with disdain any attempt, whether subtle or blatant, to influence the interest rate decisions of the Committee. On hearing of this attempted interference by the Prime Minister and the Chancellor in the MPC decision-making process, every red-blooded member of the MPC must have experienced a momentary urge to stick up two fingers at the forces of darkness by raising Bank Rate by 50 basis points just to teach them the meaning of central bank independence. Such anger must have been felt most keenly by those members of the MPC who were, on the inherent economic merits of the case, inclined towards lower rates. Of course, the members of the MPC are wise as well as red-blooded and will do no such thing. The rate will be set at the level where the majority of the MPC thinks it will optimise its contribution to the achievement of the inflation target over the horizon that the MPC can influence the inflation rate. If that means a cut in rates, a cut will be made. If it means a constant rate, the rate will be kept constant. If it means an increase in rates, rates will be raised. The Prime Minister and the Chancellor are undermining one of the crowning achievements of the Blair-Brown years – the operational independence of the Bank of England. They should learn and practice the art of silence when it comes to future rate decisions of the MPC.

Maverecon: Willem Buiter

Willem Buiter's blog ran until December 2009. This blog is no longer active but it remains open as an archive.

Professor of European Political Economy, London School of Economics and Political Science; former chief economist of the EBRD, former external member of the MPC; adviser to international organisations, governments, central banks and private financial institutions.

Willem Buiter's website