Bank of England in line of fire over UK’s
double-digit inflation
After 25 years of independence, questions are being
asked over whether officials in Threadneedle Street have lost control
Chris Giles
in London YESTERDAY
https://www.ft.com/content/c233c60e-7d88-465a-9b8b-c35b6a5ca339
With UK
inflation hitting double digits, the most in over 40 years and the highest in
the G7 group of large economies, the Bank of England is in the line of fire
from politicians and economists.
The UK’s
central bank was granted independence 25 years ago with the brief of
maintaining inflation at 2 per cent. But now there are questions around whether
the officials in Threadneedle Street have lost control.
The team
surrounding Conservative leadership hopeful Liz Truss is pointing the finger of
blame at Andrew Bailey, the BoE governor, and his monetary policy colleagues.
In the words of Kwasi Kwarteng, favourite to be the next chancellor: “If your
target for inflation is 2 per cent and you’re predicting 13.3 per cent,
something’s gone wrong.”
Suella
Braverman, attorney-general and a key Truss ally, went further, telling Sky
News earlier this month that in a coming review of the BoE, Truss would look at
whether it was “fit for purpose in terms of its entire exclusionary
independence over interest rates”.
The main
case against the BoE is that it was asleep at the wheel as the economy emerged
from the coronavirus crisis. This allowed spending to rise too quickly as
officials failed to spot impediments to growth left by the pandemic. The result
was excess demand and inflation.
Every
quarter since May 2021, the BoE has been surprised by the strength and
persistence of high inflation. Between then and earlier this month, it has
gradually raised its estimate for peak inflation from an annual rate of 2.5 per
cent to 13.3 per cent. Double-digit inflation is expected to last for a
year, well in excess of inflation forecasts for other similar economies.
Andrew
Sentance, an outspoken former member of the BoE’s Monetary Policy Committee,
said the central bank had “acclimatised” people to extremely low interest
rates. This, he said, was compounded after the pandemic by the BoE being “so
slow in noticing some of the supply side and inflation problems that were
building up”.
Sentance is
sometimes dismissed inside the bank as a hawk who has always wanted tighter
monetary policy, but his views are shared by other former officials who do not
want to publicly criticise the BoE.
One former
senior official and MPC member was amazed that the committee had continued with
its quantitative easing programme and had printed money and bought assets
throughout 2021, even though the recovery was much stronger than it had expected.
Jagjit
Chadha, director of the National Institute of Economic and Social Research,
said the BoE ought to have moved quicker. “They seemed reluctant to say
[interest rates] needed to be normalised from such an extraordinarily low
level,” he said.
His point
was echoed in the regular meetings of a shadow MPC run by the rightwing
think-tank the Institute of Economic Affairs. A majority of its members called
for QE to be stopped in April 2021 and for interest rates to rise in July last
year, half a year before the BoE acted.
But Bailey
dismisses these criticisms. There is growing irritation inside the BoE that it
is taking the blame for what it sees as largely a global problem beyond its
control.
“I don’t
know anybody who reasonably can say they could have forecast a Ukrainian war a
year ago,” the governor complained in the press conference after the BoE told
the public earlier this month that a recession was necessary to bring down
inflation.
The war,
along with impediments to global supply chains after Covid-19, were all beyond
the BoE’s control, he added, and blamed these factors for both the UK’s high
inflation and its difficult economic outlook.
Bailey
likes to note that the BoE was among the first of the leading central banks to
tighten monetary policy when it first raised interest rates in December last
year.
MPC members
are keen also to highlight what they see as the benefits of an independent
central bank controlling inflation.
Jonathan
Haskel, an external member of the interest rate setting committee, took to
Twitter with a chart showing that despite the current problems, average UK
inflation over the past 25 years had almost exactly hit the BoE’s 2 per cent
target on average — and this performance was better than any previous quarter
century stretching back for 800 years.
There were
periods when inflation was lower and also when it was close to 2 per cent,
notwithstanding the difficulties of measurement, but there was no period when
it was as close to the target with as much stability as the period since 1997,
when the bank was granted independence.
Haskel’s
chart was a modified version of one used by professor Ricardo Reis of the
London School of Economics to show the benefits of central bank independence
and inflation targeting.
But Haskel
did not mention that Reis’s latest academic paper, which includes the chart,
sets out the errors he thinks all central banks have made since the start of
the pandemic, exacerbating inflation.
For now,
according to Reis, the challenge is to bring down inflation. As it is very
high, reducing it will involve nasty medicine. This includes “accepting lower
levels of real activity”, “acting vigorously and sharply in the near future
with raising interest rates” and “restating as loudly and convincingly as
possible the primacy of price stability as the goal that guides policy”.
Once
inflation is much too high, it is costly to bring down, regardless of who was
to blame.
Sem comentários:
Enviar um comentário