The Weekend Debate: Bank of England independence – an economic success story or a well-intentioned failure?

Here’s your starter for ten in our weekend slot where we throw up an idea or thought for debate…

The Liberal Democrat 1997 manifesto said the following:

We will turn the Bank of England into a UK Reserve Bank, free from political interference. We will charge the Bank with keeping inflation low and make it accountable to Parliament for achieving this goal.

Of course after Labour’s landslide victory in that election, one of Gordon Brown’s first decisions as chancellor was to borrow this Lib Dem policy and essentially transfer responsibility for monetary policy to the Bank of England.

Most Labour politicians look back on this decision as one of the best that Labour implemented, precipitating a decade of low inflation, low interest rates and consistent economic growth. Indeed over the course of the economic good times of the decade or so before 2007, there was a wide consensus that Bank of England independence had been an unmitigated success, mainly because political considerations had ostensibly been removed from decisions on interest rates.

But since the financial crash of 2007-8, there has been a notable increase in criticism of the Bank itself, both of its attitude before the crash and the allegedly slow reaction after problems in the financial system became apparent.

In an op-ed in this week’s FT, the paper’s economics editor, Chris Giles, said the following under the headline ‘Bank independence was a well-intentioned failure’:

Every so often we should apply Monty Python’s Life of Brian to a new situation. “What has Bank of England independence ever done for us?” I have asked this counterfactual question of many senior figures over the past two months and no one had a great answer. None exists.

The traditional argument for central bank independence rests on preventing politicians from cutting interest rates before an election and stoking an unsustainable credit expansion. We don’t know what then-prime minister Gordon Brown would have done with the monetary policy lever, but it is difficult to make the case that elected politicians would have adopted a more irresponsible policy stance than the unelected officials at the BoE.

By contrast, it is simple to build a compelling counterfactual case that policy would have been better without BoE independence. Knowing the BoE dithered as the financial crisis started in 2007, Britain would have been quicker to spot the dangers, providing greater protection against the global crisis of confidence that occurred after the collapse of Lehman Brothers.

There is also no doubt the media, parliament and financial markets would have scrutinised ministers more carefully than central bankers in the period before the crisis.

And as Giles points out, the Bank of England is soon to be handed a whole range of new powers by the government relating to financial regulation, making a debate about the adequacies of the Bank all the more important.

So, over to you Lib Dem Voice readers. Has the Bank of England proved itself not fit for purpose? Should politicians take a more active role in monetary policy? Or was the decade of what Sir Mervyn King calls “sustainable growth” before the financial crisis proof of the benefits of independent central banking?

* Nick Thornsby is a day editor at Lib Dem Voice.

Read more by or more about , or .
This entry was posted in News.


  • Firstly, anyone who believes it is anything more than nominally not political is deceived. It is clear they act on political considerations, and that these tend to coincide with the wishes of the government of the day, even if there are no explicit instructions coming from Number 11. Eddie George was frank about this.

    Further, Eddie George was also clear, to MPs in the TSC on 20th March 2007 (Hansard, 2007. Treasury Select Committee, Minutes of Evidence, Lord George, 20th March, 2007. Available at retrieved on 26/03/2012), that they stoked the boom deliberately (as many of the rest of us yelled to anyone who would listen from about 2003 onwards) leaving it up to his successors to “sort that out”.

    While the Bank and the State have the same interest in the stability of the currency they jointly “own” it cannot be non-political.

    Monetary reform is more necessary than ever. Shuffling the deck chairs of the relative responsibilities of the Treasury and the Central Bank is just tinkering. And in this case, helped to cause the unsustainable boom of which this bust is the god-awful consequence.

  • Oh, and was it well intentioned? No, it was cynical manipulation of public perception. Labour was only able to win in 1997 having persuaded the City in the Prawn Cocktail Offensive that they could be trusted with the economy. This was part of the window dressing on that.

  • Jock Coats12th May ’12 – 12:45pm………….. Labour was only able to win in 1997 having persuaded the City in the Prawn Cocktail Offensive that they could be trusted with the economy………..

    What? After the sleaze ridden, corrupt Major years, Labour would have romped home on any platform. Even Ed. Milliband, as a leader, would not have curtailed that victory.
    As for ‘trusted with the economy”; in general, yes! But theyalso pledged much which was deemed, by business spokespersons, to spell doom and disaster for the economy (the minimum wage for instance).
    You make it sound like a ‘close run thing’; Labour won twice as many seats a Tory/LibDem combined (and that was even with LibDems more than doubling their seats to 46).

  • Bill le Breton 12th May '12 - 3:29pm

    Does the Bank of England deserve to keep its independence?

    It has overseen and compounded the greatest reduction in aggregate demand since the Great Depession.

    The Government has given its Governor a knighthood for this performance, instead of his P45.

    The Bank of England failed to see the ‘turn’ from leveraging to deleveraging and so entered alonf with other central banks what should have been a manageable cyclical recession with interest rates too high. Held them there in the face of economic decline and failed to reduce them for six months following the collapse of Lehman’s brothers.

    It panicked markets when it demanded commercial banks increase their capital which, by putting the skids under asset prices, worsened the situation, creating a hole in their balance sheets which was filled by public funds which have cost the British public dearly.

    These may perhaps be returned during any future sale of these shares, but the opportunity cost of not having that ammunition and not having effective commercial banking for the last four years is incalculable.

    Not only should the Governor and those responsible for monetary policy within the Bank have been sacked, those on the MPC who were responsible for consistently getting their interest rate decisions wrong should also have been replaced.

    In the circumstances should these powers be repatriated to elected and accountable representatives answerable to Parliament? Yes.

    Only when a politician has a direct fiduciary duty will they take the extreme care over their decisions and to ensure they are informed. The Bank of England is a Quango. The public can’t sack its Governor, it can a Government.

    This was and remains a failure of the Establishment which we can see from Leveson is skilled at looking after its own.

  • Richard Dean 12th May '12 - 4:18pm

    @Bill le Breton. I agree , except that the people at the bank are not wholly to blame. As I remember the newspaper articles at the time, the theory was that modern economics knew everything about the consequences of any particular choice of monetary policy, and that monetary policy was independent in the sense that the range of measures designed to achieve inflation targets would have no effect at all on anything else in the economy. We now know the theory was wrong. It guided those responsible to take what now seems to have been wrong decisions (to be fair they may have been the best they cold do within the instututional limitations) .

  • I am half-way through reading Alistair Darlings account of the financial crisis. He seems to have had quite a tussle with Mervyn King about the need for timely intervention in the Banking Crisis. Mervyn King was reluctant to act decisively citing the need to maintain ‘Moral Hazard’ as a deterrent to irresponsible risk taking.

    Have to agree with Bill le Breton on this. With the bank taking responsibility for Macro-prudential oversight and the blurring of monetary policy tools with fiscal policy, parliamentary accountability is essential.

    Interest rate policy might well be better being transparently rules based on a Taylor rule or NGDP target. This would eliminate the risk of a Chancellor artificially inflating the economy in the run up to an election and thereby remove the concerns that led to the establishment of an independent MPC.

  • Bill le Breton 12th May '12 - 6:39pm

    Joe, did the Bank push RBS over the edge? The TV prog about RBS showed Fred the Shred telling a analysts’ meeting that there were no plans to raise extra capital. Then, six weeks later came their rights issue. You could say that Fred was dissembling … or perhaps his and the hand of the Board of RBS was forced by the Bank of England, weakening its credibility just at the worse possible moment.

  • Bill le Breton 12th May '12 - 6:41pm

    Sorry to have another go … but that might fit B of E responding to Darling, who thought the whole issue was lack of capital. … not really understanding that banks find the reserves after they have found the borrower.

  • Bill,

    I am only part way through the book. Fred Goodwin visited Alistair Darling in Edinburgh during the Christmas period to tell him the BofE was not addressing the liquidity problems in the credit markets and they needed help. The special liquidity scheme was introduced shortly afterwards as the scale of the crisis became clearer.

    Fred Goodwin could never bring himself to admit that ABN Ambro was a dud until RBS had to report a 24bn loss. The largest loss in UK corporate history. He maintained throughout that the bank was never insolvent but suffering from a liquidity problem as the credit markets froze up.

    The Chairman of RBS eventually called Alistair Darling to tell him that they would have to shut their doors within hours without a government bailout – closing ATM’s and shutting down merchant card processing. By that point the issues of liquidity v capital and moral hazard had all become academic – the government had to intervene to maintain confidence in the banking system.

  • Jason: no, not the election being a close run thing. The Prawn Cocktail Offensive was several years before that, under John Smith and Mo Mowlem. That made them credible with the City, which in turn allowed them to move forward without scaring the bejeezus out of the Square Mile.

    Bill: whilst overseeing the biggest fall in “aggregate demand” (as an Austrian I’m not sure I even believe in that concept) is probably bad, what was worse was overseeing what Eddie George told MPs was an unsustainable growth in the same that so distorted our economy. The Bank of England has been a confidence trick since 1694 IMO and especially since 1844. I don’t really believe that any amount of tinkering with it is ever more than window dressing.

  • Jock, Major didn’t even enjoy the support of his own MPs for the last few years of his leadership, no way was the electorate going to back him in ’97

  • You might have missed the bit above where I said I was not referring to the election itself. To get past the car-crash of the eighties and Kinnock they had to gain the confidence of the City. This is not, so far as I am aware, a controversial analysis. Most people I know seem to think the Prawn Cocktail Offensive was key to rehabilitating Labour in the post 92 period. As we have seen in 2010, unpopularity and incompetence by the incumbent regime does not necessarily mean a landslide victory for a hopeless opposition.

Post a Comment

Lib Dem Voice welcomes comments from everyone but we ask you to be polite, to be on topic and to be who you say you are. You can read our comments policy in full here. Please respect it and all readers of the site.

To have your photo next to your comment please signup your email address with Gravatar.

Your email is never published. Required fields are marked *

Please complete the name of this site, Liberal Democrat ...?


Recent Comments

  • Suzanne Fletcher
    Very well done Paul Kohler. It is so true that there are many here seeking sanctuary for the same reasons as the Ukrainians, but their country has not been in ...
  • Peter Watson
    @Brad Barrows "It may be smart politics to be trying to attract middle and higher income groups to switch from voting Conservative to voting Liberal Democrat, b...
  • Brad Barrows
    Hi Roland One key difference between Conservative and Liberal justices is that Conservatives usually interpret the Constitution on the basis of the words used ...
  • James Pugh
    @Roland The method of drawing legal rulings from the Constitution by the Supreme Court based on whether or not something is rooted in the nation's history, i...
  • Brad Barrows
    @Jeff Thanks for your post. Interesting....