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Scrap EU-style Bank of England rules

John Redwood MP
May 23, 2023

The UK debate is stultified by too much agreement around misleading and inaccurate soundbites. There is the cross party agreement that the Bank of England is independent. They say this about an institution 100% owned by the state. The government chooses the Governor. 

The Bank has to report regularly to Parliament with the Governor subject to Treasury Committee approval and cross examination. The Bank’s own website states that the Bank acts as Agent of the Treasury when it comes to buying bonds and managing its bond portfolio. 

For some fourteen years the main monetary policy the Bank has followed entailed buying up an enormous umber of bonds at very high prices and then starting to sell them. They are doing this at prices the Bank itself lowered so they could lose big money on the transactions, all guaranteed by the Treasury and taxpayers who pay the losses.

The parties imply by their doctrine that the Bank is uniquely wise and well placed to keep inflation down to 2% whilst avoiding a banking crash, whereas Treasury Ministers and officials would not be. 

Given the banking crash of 2008-9 and the great inflation of 2022-23 it is difficult to know why people so lack curiosity over outturns and have such an elevated belief in the wisdom of the Bank. 

I remember backing a Labour Chancellor when he effectively overruled Bank set interest rates in the depth of the banking crash to bring some relief to the disaster, as did other Finance Ministers of leading countries concerting action to ease the squeeze.

Why has there been no proper enquiry into how we ended up recently with 11% inflation, more than five times target, when the Bank’s main task was to keep it to 2%? Why did inflation hit 5.5% before the Ukraine war and energy price surge? Why does the Bank fail to monitor and comment on the growth or contraction of money and credit? Why did the central banks of Japan and China keep inflation down in the last two years despite these countries being big importers of energy?

The Bank and the OBR combined have been great advocates of EU style rules for running our economy. These rules have turned out to be predictably destabilising.

They were at their most pronounced when the UK was shepherded into membership of the European Exchange Rate Mechanism, only to enjoy a predictable inflationary boom followed by the inevitable bust as a few of us warned at the time. The UK then moved to accept the Maastricht debt and deficit criteria as the guiding stars of economic policy.

These allowed the boom and bust cycle of the banking crash, and allowed the large increase in money and credit in 2020-2021 which was also bound to be inflationary.

The government was persuaded to review the wisdom of making these the guides but accepted advice which recreated the 5 year debt as a percentage of GDP control.

This will continue to destabilise by being pro cyclical requiring cuts in a downturn and allowing increased spending in a boom. Its effects will be made worse by over pessimistic forecasts from the OBR of what the deficit will be in five years time. This is a figure none of us can forecast with any hope of accuracy.

As the government looks to use some of our Brexit freedoms it should start with the right to have a better and more stable means of controlling the economy.

It should elevate the Bank’s 2% inflation target into a target for the whole government as well. It should add a complementary growth target of say 2% to encourage policies that allow expansion of output and real incomes.

The government needs to do more to combine faster growth with lower inflation. That means adopting a range of regulatory and tax policies that encourage a substantial expansion of capacity in various sectors in our economy.

We need to produce more of our own energy, grow more of our own food, rebuild more of our main energy using industries, expand our domestic fishing fleet, increase the number of beds and medical teams in our hospitals and surgeries, raise the capacity of our roads and railway lines and much else besides.

The government needs to do more to combine faster growth with lower inflation Quote

Much of this other than the NHS needs private capital, which in turn will flow more freely with lower business taxes. Our very high carbon taxes drive more and more industry abroad, leading to more CO2 globally as we ship product back as imports.

They and the windfall taxes impede adding more UK gas, oil and electricity generating capacity to our system, with regulators and government pushing for ever more imports via extra pipes and cable under the seas.

The UK has too few producers and too many onlookers, too little domestic capacity and too many imports, too few incentives to venture and too many taxes impeding starting out or being successful.

Revision of the rules needs to start with the debt and deficit mantra that has helped give us boom and bust for the last thirty years, and a new interest in money and credit at the Bank of England.

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John Redwood is the Conservative MP for Wokingham and a former Secretary of State for Wales.

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