April 8, 2008
The bad Gordon tries to mug the MPC
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.
There was never a Good Gordon, He was a delusion borne of wishful thinking by righteous folk which by some bizarre and little understood mechanism impregnated the soul of the Real Gordon.
Having almost immediately awoken from this state of grace, the Real Gordon has attempted to reverse the effects of his temporary sanity by fiddling the inflation rate to suit his feckless administration of the UK economy.
Each and every day the Real Gordon wrings his hands frustrated and vengeful that they no longer fully grasp the levers of power.
In the dying days of his rule, mortal danger awaits as the Real Gordon seeks to unstitch the works of this former self.
Posted by: Gareth D | April 9th, 2008 at 9:21 am | Report this commentThe statement says it all. The “primary” aim of the MPC is price stability. “Subject to that” the MPC should support the Governments’ other objectives. In other words, if and only if inflation is under control should the MPC be offering to help an economically incompetent Government.
Is the MPC ensuring price stability? Not sure. RPIX (the original measure of inflation before Gordon realised he could massage the figures in 2003 by moving to the lower CPI) is now at 3.7% up from 3.4% in January. Economic growth is falling and inflation is rising….or by another phrase… stagflation is occurring. I understand the economics to suggest that a rate cut may be necessary to prevent a further decline in growth, however surely the bigger solution and the topic Mr Brown should be addressing is supple side efforts to boost the economy which clearly fall within his remit.
The Government is essentially trying to blame their economic mis-management on the MPC. By changing the definition of inflation and by failing to tackle the ever increasing levels of debt within the economy, the government has sought to gain economic credibility by (free) riding the global economic upturn and by adopting myopic, electoral cycle economic policy.
I find it slightly pathetic that now things have gotten tough, the Government is seeking to influence monetary policy through the backdoor (or without regard to the long term inflation target). Precisely the kind of behaviour Gordon was trying to avoid when he gave the MPC operational independence.
Posted by: Dean F | April 9th, 2008 at 11:47 am | Report this commentThe government is being remarkably slow to recognise the issues that face us. Surely the role of the Bank of England extends to a bit more than interest rate decisions. If ever there was a time to worry about middle England it is now. I am a property solicitor in the north east and things are dire here. Both the commercial and residential property market has stalled to an extent that firms here are making lawyers redundant every week. This has never been seen since the last property crash. We are in a crisis situation which will not be helped by interest rate cuts. It is clear that the financial sector has had the proverbial rug pulled from underneath them. With no money available in the inter lending markets the net effect is no property transactions. If you think 2.5% is bad this month then it is going to be far worse next month. I have clients taking well over 15% below the market value for their properties. We are not at the bottom yet. Where do we lay the blame for all of this? Is it the Bank of England or the Prime Minister. The jury is still out as far as I am concerned. Both seem woefully inadequate at the moment, may be it is time for change all round. It strikes me the Bank of England are only any good when the going is good.
Posted by: Smell the Coffee | April 9th, 2008 at 1:06 pm | Report this commentThere are three important variables confronting the MPC with regards to interest rates, in order of importance.
1. The falling value of the Pound.
2. The economy.
3. Inflation.
If the Pound goes into freefall, there is nothing the bank can do to prevent it.
Posted by: M. SAUNDERS | April 9th, 2008 at 2:29 pm | Report this commentThe UK has not got the economic muscle of the USA to buck the market and the Pound is out of the Euro so it has nowhere to hide, nowhere to run.
There are numerous problems ahead; the balance of payment, the housing bubble, inflation, slowdown in the economy etc.
What ever the MPC does, the writing is already on the wall.
Batton the hatches and wait for the storm to subside.
M.Saunders
Gordon Bean is almost making credible the joke that one Tony Blair was the real author of the extraction of the sticky Governmental digit from interest rate decisions, back in 1997.
Posted by: David Heigham | April 9th, 2008 at 3:28 pm | Report this comment“Politicians, prime ministers included, are a dime a dozen - they come and go and barely leave a trace in the sand” - The situation we are in shows how wrong these words are. Politicians have a great capacity for damage as this government has decisively demonstrated. Good politicians barely leave a trace in the sand, bad politicians are a disaster!
Posted by: Joe Bejamin | April 9th, 2008 at 4:13 pm | Report this commentThe MPC is the closest equivalent we have in the UK to the US President’s Council of Economic Advisors, but with a far more restricted remit. The Bank of England has responsibility for financial stability and systemic banking risk and produces stability reports and some macro-economic analysis. It compiles National Financial statistics that in turn rely on data from the British Bankers Association and the Office of National Statistics. The MPC members have privileged access to all this information, and so too has HM Treasury.
I suggest to Willem Buiter and others that the MPC should be able, like the US Council of Economic Advisors, be at least able to take a more detailed view of what is required to ensure price stability, including knowing whether or not changes in the central bank rate are effective, more precisely how and where. Inflation, as applied economists know, is caused by sudden imbalances among economic sectors, not just a general uniform condition, and much influenced by changes in bank lending across all sectors.
The Bank of England’s MPC is not entirely independent. Its decisions currently have to involve HM treasury, which retains operational involvement via the Debt Management Office, and potentially therefore also political judgment. When the Bank of England’s MPC was given independence to determine the bank rate, operational management of National Debt and gilt market operations were removed from the Bank of England and placed in the Debt Management Office of HM Treasury.
It is therefore perhaps naive to think politics and finance can or should be entirely decoupled. Moral hazard and responsibility, authority, and information and analytical expertise for high level management of the economy as a whole may invite too much risk if split among so many quasi-independent silos, much as today some now worry about the tripartite governance of financial risk. Some division of authority and responsibility is productive and a quality safeguard. I can see no reason, however, why the MPC members, working with the Bank of England’s resources, as they do, cannot analyse and describe economic circumstances in more detail and more comprehensively than they do now with regard to price stability and thereby also comment on general economic policy. The US Council of Economic Advisors reports at least annually, and very clearly, what the current US economic policy is, while here in the UK we have to divine UK economic policy by raking through the runes of The Chancellor’s Budget statements and reports with income and expenditure separated between November and March (one of Chancellor Brown’s innovations). If there is one thing that makes it hard for economists or bankers and insurers when stress testing their assets and liabilities to determine what is happening in the UK economy and what may happen in the near future, it is the near impossibility of obtaining a concise statement of the Government’s current economic policy from a single authoritative source.
Posted by: Robert McDowell, Edinburgh | April 10th, 2008 at 12:49 pm | Report this comment