Gordon Brown has dined out on his success in making the Bank of England independent. Many give him credit for this and assume it has led to a uniquely favourable out-turn for interest rates and inflation.
In practise the UK has continued to pay a price. Our interest rates have been continuously higher than US, Japanese and Euro rates throughout the period. Japan’s rates have typically been under 1%, ECB rates around 2% and US rates around 3% compared with 4% plus for the UK since "independence".
Now our inflation rate, always well above Japan’s, is also above Euroland’s and the US, so the extra pain of higher rates is not giving us the gain of lower inflation.
In parctise there has been plenty of political intervention in the workings of the Bank. The msot notorious was the foolish decision to shift the target rate from the RPI to the CPI in 2003. This was a deliberate and misguided politcal decision to try to bring us more in line with the Euro. From this point onwards our path has diverged from Euroland as our inflation rate has accelerated, and our growth advantage has eroded. It seems to have encouraged easy money for a bit at the Bank, when they cut interest rates before inflation was under control. It is all part of the continuing price we pay for the Euro dream – just as the Bank of England and Gordon Brown were keen advocates of the ERM and have never said sorry for their mistake, shared with the Conservative government of the day.
In addition Gordon Brown appoints a majority of the members of the Bank of England, and Ed Balls clearly takes a close interest in what they do. The Chancellor has both delayed appointments unreasonably, and made some controversial choices.
The Bank has been thrown off course by the CPI switch and are now having to inflict higher rates on us to rein things back. The Bank and the system are not independent enough, and Gordon’s infallible knack for making the wrong call, as he did with the ERM, has not deserted him.