One of the myths that needs to be cast aside in any review of the role of the Bank of England in recent years is the myth that the Bank is and can be independent. In a democracy voters take great interest in economic progress as it affects their jobs, their incomes and their living standards. They hold the two senior elected officials, Prime Minister and Chancellor, to account for economic progress, along with the government generally. A government may choose to entrust part of its economic management to the Bank, but will be blamed for its failure and claim credit for its success.
Far from making the Bank independent, the last Labour government demonstrated just how much of a creature of the government it is. At the beginnning of their tenure they stripped the Bank of its powers to monitor and control the day to day workings of the commercial banks. They passed this important work over to a new body, the FSA.
They claimed to give the Bank more independence to fix interest rates. However, all the MPC members were government appointments directly or indirectly. They never explained why some were renewed and others were not. They changed the requirements from RPI to CPI at a crucial point, in a way which moved the Bank to an easier money policy as the bubble was growing. They rightly overrode the Bank , cutting interest rates in international Finance Minister crisis meetings. They asked the Bank on one crucial occasion to endorse such action in a special meeting of the MPC, which they duly did.
The Coalition has changed the Bank’s powers and remit again on taking over government. They say this is to create a stronger independent Central Bank. However, the government itself still signs off decisions to print more money, and often expresses views on bank regulation and credit easing.
In reviewing the Bank’s conduct in recent years it is important to be fair and to understand that there were high levels of political intervention at crucial times. When it came to cutting interest rates in the middle of the crisis the politicians were wiser than the Bank and correct to force their hand. When it came to choosing MPC members, to changing targets and removing powers to control banks, the politicians made the Bank’s task more difficult. Governors traditionally work closely with the government of the day to avoid public conflicts of view.
The famously “independent” German Central Bank of the post war period was instructed how to handle ostmark/DM union when it gave wise independent advice the politicians did not like. It was also told to surrender the DM altogether, the very currency its ” independence” was meant to protect!