Opinion: Keep the Bank of England Independent

Liberal Democrat Voice at Conference

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Conference on Monday will debate an amendment from the Social Liberal Forum (SLF) to the Economy Motion which calls the government to “monitor closely the progress of the Bank of England, ensuring it has a refocused mandate that allows monetary policy to aid growth, reduce the unemployment rate to below 6% creating at least a million jobs, and to address weak income growth, targeting a higher level of national/median income.”

Who could possibly disagree with that? Well, me for a start. In practice this is reducing the independence of the Bank of England.

Liberal Democrats have long argued that the Bank of England should be operationally independent. In other words that politicians should set a target, and then let experts work out the best way to achieve it. This amendment threatens to involve politicians in day to day interest rate setting, which is a terrible idea.

We started to push for Bank of England independence back in the 1970s when we saw the massive damage done by politicisation of interest rates. When elections were coming up, politicians were tempted to cut interest rates, creating a boom and bust cycle, and consequently huge levels of unemployment. Through the 1980s this continued.

In 1997 we won the argument and independence has been a huge success. Unemployment has been much lower than in previous times, even through the recent recession, and inflation has been much lower and more stable.

It would be a massive backwards step if a governing party starts telling the Bank of England what to do, and what to focus, on as this amendment does. And make no mistake, specifying the targets as this motion does most certainly is telling the Bank of England what to do.

It is right for government, as it recently did, to allow the Bank of England to respond to a very unusual economic climate by asking them to give forward guidance. They did that in August – stating that all other things being equal they will hold interest rates at 0.5% until unemployment falls below 7%. The unamended motion reflects this. But that is very different from government giving the Bank marching orders on monetary policy as a whole.

No set of elected politicians, are in a better position to make better judgements on how to reach targets set by politicians, just in the same way that allows NHS ministers to decide which drugs are effective is a bad idea rather than leaving it to scientists.

Most worryingly this would open up the risk in future of Ed Balls, or an unchecked George Osborne, dictating short term interest rates to suit their own political needs. Ironically the outcome would almost certainly be higher unemployment and inflation, and lower living standards.

And if you won’t take my word on this how about that of Vince. In his maiden speech in parliament Vince said, “The reason why it is important for central banks not to suffer day to day political intervention is that it is difficult for such intervention to be successful, because of the long lags in economic policy.”

* Rob Blackie is a candidate for the 2020 London Assembly elections. When not campaigning, he advises charities and corporates on digital strategy.

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11 Comments

  • Eddie Sammon 15th Sep '13 - 9:54am

    Bank of England independence is a side show, we should vote against this bill because its recommendation to print money is likely to damage our economy in the medium to long-term.

    This is because printing money only benefits those who get it first at the expense of those who see it last. This risks other countries copying us to negate its cost to them and the net effect is just more instability in the global economy.

    Something for people to think about.

  • A very false argument Rob.

    You can argue about what Target/s should be set -and lots of reputable economists and economic commentators have said that the Bank’s current Target is too narrow.

    But you can’t argue that the Government setting Targets is wrong because that is the whole point of the system that was created in 1997 and that we alone of the British Political parties had argued for prior to 1997 . The democratically elected politicians set the Target/s and the Bank tries to achieve them without short term political interference based upon the next looming by election or set of elections.

  • Bill le Breton 15th Sep '13 - 10:32am

    The Bank of England is setting the instruments of monetary policy to deliver an unemployment rate of 7% by 2016 – that is, it is interpreting the goal of Coalition policies as aiming to deliver an unemployment rate of 7% in 2016.

    Is that good enough for Liberal Democrats? Clearly not. The Leader himself is saying today that his personal ‘goal’ is to deliver a million more jobs. That would imply getting unemployment down to 6%.

    He also wishes to raise living standards by increasing income levels across society and, yesterday, that he wants to give local authorities the power to launch a major house building programme.

    These issues are laudable, sensible and feasible. But they are not contained in the Leader’s motion on the economy. The SLF amendments place them there, centre stage, where they belong.

    The amendment s are a clarification of the Leader’s thinking. It sends a clear and distinct message to the British public and to those who might in the future wish to become or remain our Coalition partners.

  • Paul Holmes

    If the Lib Dem were the only party arguing for it then how come a Labour CoE did it? Surely he wouldn’t have done it if he didn’t also think it was a good idea?

    I am not saying the Lib Dem have been proponents for many good things but trying to always pretend that it is only them that have them is ingenuous.

  • Paul in Twickenham 15th Sep '13 - 10:48am

    @bcrombie – the Liberal Democrats were the only party that publicly supported the policy of independence for the Bank of England in 1997. In fact, it took The City completely by surprise when he announced it just a few days after the 1997 GE.

    In his memoirs, Blair claimed it was actually his idea and Brown was simply the messenger boy for the new policy. It is a salutary reminder of long-term averages for interest rates that Brown chose to make the announcement while simultaneously increasing the base rate to 6.25%.

  • @bcrombie – Paul in Twickenham clearly answers your point. In fact many in the Labour Party of course still resent the independence of the Bank of England as they hanker for the days of ‘controlling the commanding heights of the economy’.

    For myself I have never ever ‘tried to pretend that only the Liberal Democrats ever come up with good ideas.’ Indeed one of the reasons I joined the then SDP/Liberal Alliance in 1983 was the emphasis that when other Parties had good ideas we should welcome them and work with them not reject everything out of political partisanship. How different, for example, to Ed Milliband’s trashing of Lords Reform for short term political advantage.

  • Paul Holmes 15th Sep '13 - 1:45pm

    I still don’t see your problem Rob.

    The democratically elected Government set the Target/s and the highly paid Governor of the Bank plus their highly paid economic experts try to achieve it/them.

    I have never before heard anyone seriously argue that there can only be one Target to the exclusion of all else and that Target/s cannot be changed by the democratically elected Government according to either changing economic or social or political circumstances.

  • Bill le Breton 15th Sep '13 - 1:59pm

    Rob, a successful decade of central banking? You cannot be serious. It is the central bank that sets the level of aggregate demand (nominal GDP) in the economy. Since 2003 did you miss the boom, the bust and the stagnation.

    This is why we brought in Carney.

    Are you saying that a Liberal Democrat government would not have as its economic goal to increase real incomes across the board and to reduce unemployment? That is what a stronger economy and a fairer society is mostly about. So, if like me you think it would, then, you should support the amendment.

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