The United Kingdom has been blessed since 1997 with an exemplary division of labour between the government of the day and the central bank. The government makes fiscal policy, sets the inflation target and appoints all but two members of the nine-member Monetary Policy Committee of the Bank of England. The remaining two members of the MPC are appointed by the Governor of the Bank of England after consultation with the Chancellor of the Exchequer. The Bank of England sets Bank Rate to pursue its legal mandate, as stated in the Bank of England Act 1998.
Operational independence for monetary policy was granted to the Bank of England in 1997 by the then Chancellor of the Exchequer, one Gordon Brown. This good Gordon no longer holds the job of Chancellor, and I have no idea what became of him.
For the benefit of his successor, and of the current prime minister – a man who strangely enough carries the same name as the 1997 Chancellor of the Exchequer but is in no way related to that far-sighted institutional innovator – let me restate the legal mandate of the Bank of England:
“In relation to monetary policy, the objectives of the Bank of England shall be –
(a) to maintain price stability, and
(b) subject to that, to support the economic policy of Her Majesty’s Government,
including its objectives for growth and employment.”
Not only did the good Gordon establish this useful division of labour in monetary policy between the conduct of monetary policy by an operationally independent Bank of England and the setting of the inflation target by the government of the day; the UK during his term as chancellor also developed the highly praiseworthy tradition, unique in Europe, that the central bank does not comment on or give public advice about the policies of the government of the day and the government of the day does not comment on or give public advice about the conduct of monetary policy. This reciprocal MYOB code of conduct served the nation well.
This tradition was dented but not quite holed below the waterline by the current Chancellor, Alistair Darling, on January 8, 2008, when he tried to nudge/nobble the MPC at a joint press conference with Tony Blair’s successor – the bad Gordon.
That same First Lord of the Treasury told us on today that “Because we’ve got low inflation we can cut interest rates.” He is wrong, of course. We don’t have low inflation. Indeed inflation is, on the CPI measure that defines the target, running at 2.5 percent year-on-year, well above the 2.0 percent inflation target. An intellectually respectable case can be made for cutting rates despite current inflation being above target inflation (and likely to rise somewhat further in the short run), because economic activity is likely to slow down materially in the months to come, creating downward pressure on domestically generated inflation.
But the appropriate interest rate decision on Thursday is not obvious or self-evident. Even if it were, it would behove the Prime Minister to shut up about it. It is not his brief. It is not his responsibility. It is not his competence. This naked electoral pandering is irresponsible, thuggish party-political behaviour.
It is quite possible, indeed slightly more likely than not, that a majority of the MPC will reach the conclusion this Thursday, that a cut in Bank Rate of 25 basis points is the policy action most likely to achieve the inflation target. Since monetary policy works with long, variable and uncertain lags, inflation in the short run is either beyond the control of the MPC or can be brought closer to the target only through actions that are likely to drive inflation further away from the target in the medium and longer runs. The MPC can do the analysis and reach the correct conclusion perfectly well without the Prime Minister butting in and telling them what to do. It would be pathetic if the bad Gordon were to take credit for an interest rate cut that will not be made by him and which, if it is indeed made, will be made despite his ham-fisted, thoughtless intervention.
The bad Gordon is actively and publicly undermining the operational independence of the Bank of England. This independence is, however, worth a lot more to the nation than the political survival of a Prime Minister. Politicians, prime ministers included, are a dime a dozen – they come and go and barely leave a trace in the sand. Well-designed institutions can last for generations, and make a real difference to the wellbeing of the nation.