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Date: 2024-10-15 Page is: DBtxt001.php txt00024494 |
UNITED KINGDOM
BANK OF ENGLAND A full scale review of what went wrong at the Bank of England is urgently required ... Members of the MPC appear as confused as the rest of us as to their policies' end goals Andrew Bailey, Governor of the Bank of England ... Andrew Bailey's explanations for the Bank's failings focus on factors outside his control and fail to mention quantitative easing CREDIT: Yui Mok/Pool via REUTERS Original article: https://www.telegraph.co.uk/business/2023/04/18/full-scale-review-required-what-went-wrong-bank-of-england/ Peter Burgess COMMENTARY Peter Burgess | ||
A full scale review of what went wrong at the Bank of England is urgently required
Members of the MPC appear as confused as the rest of us as to their policies' end goals
Written by Jeremy Warner
18 April 2023 • 4:11pm
To maintain credibility, it is sometimes best to own up to your mistakes, rather than make excuses or otherwise attempt to brassneck it out.
A case in point is the world's major central banks, including the Bank of England, none of which have yet adequately explained how they so spectacularly came to drop the ball on inflation.
The last year and a half has seen the most serious breach of the core price stability mandate since the Bank of England was granted independent determination of monetary policy more than 25 years ago.
If autonomy is to be maintained, as it should be, it is essential that the Bank is held fully accountable for what went wrong.
To avoid such scrutiny is to invite political interference, as indeed was threatened under Liz Truss's short lived premiership.
Donald Trump would also have made the US Federal Reserve more subject to political direction given the chance. In a second presidency, he would undoubtedly further turn up the heat.
A full scale, possibly independent, review of errors in policy and modelling is therefore urgently required, so that lessons can be learnt and changes made.
It is not good enough for the Bank of England to simply shrug its shoulders, blame it all on external factors beyond its control – the default position as things stand – and say what's done is done, let's move on.
OK, so it is obviously the case that Putin's invasion of Ukraine was the major cause of double digit inflation.
It is no accident that the economies most affected by rising inflation in Europe are those which are also most dependent on gas for their household energy consumption.
The biggest cause of rising inflation in the UK was the sudden spike in natural gas prices.
As these abate, so too will inflation. We ought to get a taste of that in this week's inflation numbers. Base effects are arithmetically about to start bringing inflation sharply back down again.
But it is also clear that energy prices were on the move from well before the alarm on Putin's designs was sounded.
Inevitably, these quickly became embedded in other forms of inflation. In the UK and beyond, so-called “core inflation” – that is ignoring volatile prices such as energy and food – has risen to more than 6 percent.
This is a reasonable measure of domestically generated inflation coming from other costs such as wages, and it is badly out of control.
The underlying causes go well beyond the energy price shock.
Consumption came surging back after the pandemic, fuelled by unprecedented quantities of central bank money printing, into an economy whose ability to satisfy it had been impaired by prolonged lockdown.
Central banks moved too slowly in tightening policy, with the result that when the dangers were finally recognised, they were forced to move too fast.
As Mohamed El-Erian, president of Queen's College, Cambridge, pointed out at the International Monetary Fund spring meeting last week, this has created real problems in a financial system conditioned to live with ultra-low interest rates.
We have already seen a series of mini-financial crises in adjusting to higher rates.
There is no doubt worse to come. By screwing up on their inflation mandates, central banks have also endangered their separate financial stability functions.
As the chair of the House of Commons Treasury Committee, Harriett Baldwin, put it recently when grilling Andrew Bailey, Governor of the Bank of England, “Governor, do you accept that the Bank has made mistakes in terms of this tightening cycle, that you started raising rates too late and too slowly, that you have really let inflation run away in this country and that it will now be harder and more painful to get inflation back to target?”
Bailey responded by saying that he cannot make policy with the benefit of hindsight.
Inflation had been impacted by three major shocks in short order that could not have been foreseen – Covid, Putin and a sudden decline in labour market participation.
To the extent that mistakes were made, he conceded, they were to do with misjudging what would happen when furlough ended, which the Bank believed would see a significant rise in unemployment. It did not.
The Bank also worried about the Omicron variant of Covid, which turned out to be largely harmless and did not require renewed lockdown measures.
Particularly striking in the Bank's explanations so far is that virtually all cite traditional supply and demand considerations – how tight the labour market is, the inputs from rising energy and commodity prices, and so on.
There is little or no mention of Quantitative Easing, and the roughly £875bn of newly created money these programmes have injected into the economy.
This lack of regard for monetary aggregates is not surprising, because there are no monetarists on the Bank's Monetary Policy Committee.
As far as we know, very little weight is given to the money supply in the bank's modelling on the future course of inflation.
Had there been, it would have pointed unambiguously to the coming inflationary surge.
There was an opportunity to correct this omission with the Government's latest appointment to the MPC, but instead the Treasury opted for another consensually-driven Keynesian, Megan Greene.
She's a perfectly good and competent economist, but not really what the Bank of England needs right now, which is maverick voices, prepared to take unconventional views and run with them.
The monetarists saw the current spike in inflation coming a mile off.
When you pump that much money into the economy, it stands to reason it is going to have an inflationary effect, and indeed it has.
Even today, central banks struggle to explain precisely what QE, and its mirror image, Quantitative Tightening, are trying to achieve, what the transmission mechanisms are, and what effect they have on behaviour, asset prices, inflation and growth.
There is, moreover, a basic confusion in purpose.
Bailey is clear that QE is entirely a monetary tool, that only in exceptional circumstances should be used for financial stability purposes.
Yet at the IMF last week, he said that we should not assume that the Bank's intention was to unwind all £825bn of the QE so far provided.
It was important, he said, that commercial banks maintain much higher reserves at the Bank of England for liquidity purposes than prevailed before the financial crisis, though he couldn't tell us what that level was.
What is this other than QE for financial stability purposes?
It is also worth noting that more deposits held as Bank of England reserves means less credit for the wider economy, so even as a liquidity requirement, the policy implies a monetary purpose.
Confused? So too, it would seem, is the Bank of England.
This is admittedly highly technical stuff, but just because it is technical doesn't mean it should be left entirely to independent technocrats to determine what's good for us.
There are important real life consequences in what they do.
So an urgent review, please, of what went wrong, together with lessons learned, and the addition of at least one outright monetarist to the Bank's MPC.
Credibility has been badly damaged. You do not repair your reputation by sweeping your mistakes under the carpet.
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Related Topics
UK economy, Inflation, Interest rates, Bank of England, Andrew Bailey
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| The text being discussed is available at | https://www.telegraph.co.uk/business/2023/04/18/full-scale-review-required-what-went-wrong-bank-of-england/ and |
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