‘It’s the economy, stupid!’, goes the old political adage. Indeed, polling across the decades has consistently put the economy as chief among the concerns of voters. And yet in Britain today, many major economic decisions are totally out of the public’s hands.
Take this week’s decision by the Bank of England to hike interest rates from 1.25 percent to 1.75 percent – the biggest rate rise in 27 years. Whatever the rights and wrongs of the decision, it is notable that we the people had no say in it.
In fact, since the Bank of England was granted ‘independence’ from elected governments by New Labor in 1997, just nine members of the bank’s Monetary Policy Committee hold the deciding votes. These are nine people who have never been elected and who most people have never heard of. Yet they have the power to shift the economic fortunes of millions of borrowers, savers and businesses.
When the ‘independent’ Bank of England raises or cuts interest rates, prints or liquidates money, even our elected politicians are reduced to mere spectators. Chancellor Nadhim Zahawi was, according to the Spectator, not even in his office yesterday for the rate announcement. Simon Clarke, chief secretary to the Treasury, was also out of Whitehall.
Meanwhile, the two Tory leadership hopefuls could only say how they would respond to the decision if they were prime minister. Liz Truss said she would call an emergency budget. Rishi Sunak could only say it was a reminder of the ‘imperative to grip inflation’. Both know that the powerful lever of interest rates will not be theirs to pull.
The argument for ‘independence’ is essentially that politicians and their publics are too fickle – perhaps even too unwise or unlearned – to be trusted with economic matters as complex and as consequential as monetary policy. Better, it is said, to leave it to technocratic experts who know what they are doing and know what is best for us.
The Bank of England’s own inflation figures – of nine per cent now, rising to 13 per cent by the end of the year – should, at the very least, call this competence into question. The staggering price rises now hurting the nation are more than a little bit off the bank’s target inflation rate of two percent per annum.
Of course, as everyone knows, there are some major external factors that are feeding these historic price rises. The war in Ukraine has set off a global energy shock. Plus, two years of on-and-off Covid lockdowns have snarled up the world’s supply chains. The Bank of England’s counterparts in Washington and Frankfurt aren’t faring any better, either: CPI inflation is also around the nine percent mark in the US and the EU right now.
But it’s not as if the Bank of England has been a thrifty custodian of the money supply in the run-up to the recent crises. For much of the bank’s 25 years of independence, it has pursued the kind of ultra-loose monetary policies that politicians might not have dared to. Since the 2008 recession, interest rates have remained at historic lows, while the money printer has gone haywire.
It is often said that in the 25 years before independence those ‘irresponsible’ elected politicians never lowered interest rates below five percent. Meanwhile, the ‘sensible’ central bankers have kept them below two percent for over a decade now. But as Sky News’ Ed Conway has pointed out, while the Bank of England could claim to have met its inflation targets for its first two decades, the truth is that inflation had already been brought down by 1997 – by precisely those ‘misbehaving politicians’ the bank is supposed to have saved us from. Reforms to exchange rates were far more consequential in terms of keeping inflation down than central-bank independence, Conway argues.
As for ‘quantitative easing’, it is again the technocrats who have behaved like the kids in the sweet shop. Some £900 billion has been printed by the Bank of England since the global financial crisis, £445 billion of which came before the pandemic. These ultra-easy monetary conditions may have kept asset prices afloat and some businesses alive in the short term, but in the long run they have created a zombie economy drained of all dynamism.
On the 15th anniversary of bank independence, before today’s inflationary horrors could even be imagined, the Financial Times had to admit that relinquishing democratic control had been a ‘well-intentioned failure’. The usually staunchly technocratic FT noted that elected ministers would have been subjected to far more scrutiny – from parliament, from the media and from the general public – than any bank governor or MPC member. In fact, it even argued that the Bank of England’s independence may have made the global financial crisis worse – as outsourcing policy to an ‘independent’ institution meant that ministers were less responsive to the troubles brewing at Lehman Brothers and elsewhere.
Yet despite the problems revealed by the credit crunch, the Bank of England has only become more powerful ever since. After the Conservatives took power in 2010, chancellor George Osborne handed it powers to regulate the City as well as new so-called macro-prudential powers, which include testing the resilience of the financial system and setting restrictions on mortgages.
In 2013, Osborne had arch-technocrat Mark Carney parachuted in from Canada as the Bank of England’s first foreign governor. Under Carney, the bank assumed powers for even more areas of policy. Carney made it his mission to fight the twin evils of climate change and Brexit. (For now, we should at least be thankful the Bank of England is not tasked with ensuring ‘racial equity’ in the UK – which recently became the third priority of the US Federal Reserve alongside price stability and full employment.)
Then there are the many gaffes of current governor Andrew Bailey. His prediction made last year, that a bump in inflation to four percent would be ‘temporary’, shows that the experts can clearly get things wrong. And his comments in February, calling on workers to show ‘restraint’ when asking for pay rises, should make it clear that there is nothing apolitical about managing the economy. There are always competing trade-offs, interests and class conflicts. The economy is at its root about people’s lives and livelihoods, not just numbers on a spreadsheet.
Our economic future is far too important to be left to the experts. It’s time to take back control of the Bank of England.
Fraser Myers is deputy editor at spiked and host of the spiked podcast. Follow him on Twitter: @FraserMyers